Gold prices have performed remarkably well this year, with returns of nearly 20% in the domestic market and almost 30% in the international market so far. The yellow metal has attracted a lot of attention by delivering double-digit returns every year since 2019, except for 2021 when it had a negative return of 4%.
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The investment in bullion has proven to be profitable for investors. Additionally, it is an excellent trading product due to the impact of news flows, economic data releases, and geopolitical tensions, which provide traders with opportunities to capitalize on market movements. It is traded across the globe on all major exchanges such as Comex, MCX, NSE, DGCX, SGE, etc., for more than 14 hours a day, offering a wide range of lucrative prospects.
Successfully Trade in Commodities Market
For a retailer or high-net-worth individual (HNI) aiming to trade successfully in the commodities market, it is essential to understand the key market participants, including smart money such as hedge funds, bullion banks, central banks, producers, and hedgers.
Strategic trading in the commodities market requires staying updated with the current global scenario, market conditions, and geopolitics. These factors significantly influence gold prices and other commodities, making it essential for traders to stay informed.
The following are the critical factors that affect bullion prices:
Central Bank Buying Big players like central banks can influence gold prices (yellow metal). Recent data shows that major central banks have been buying precious metals, contributing to an increase in gold reserves. Countries like the USA, China, Turkey, and India have been accumulating gold reserves for the past few years, driving up the price of Gold. In the financial market, it’s important to follow trends, and observing the actions of large players can be beneficial for making informed decisions.
Global Economic Condition/ Natural Calamities: Historically, we have observed that Gold tends to perform better during economic slowdowns, recessionary environments, and natural calamities. For example, in 2008, Gold gained more than 5% when the world economy was hit by a recession. Similarly, during the pandemic in 2020, spot gold delivered a return of more than 25%.
Dollar index: The US dollar and Gold have had an inverse relationship. Gold prices tend to fall when the dollar strengthens because gold, being dollar-denominated, becomes more expensive for buyers using other currencies. Both Gold and the dollar are seen as safe-haven investments. When investors prefer the dollar, the demand for Gold usually declines, leading to lower prices, and vice versa.
Economic Data: Traders appreciate volatility, and economic data contributes to it. Significant fluctuations in Gold prices occur when major data, such as jobless claims, non-farm payroll data, and GDP data, are released. Some data is released weekly, while major data is released monthly or quarterly. You can monitor the data live on Forexfactory.com and Investing.com. Note: (For tracking Bullion prices, only USA data needs to be considered).
Geopolitical tensions: During war-like scenarios, investors tend to flock towards precious metals due to their safe-haven appeal. Gold prices have performed well during recent Middle East conflicts and the war between Russia and Ukraine. Comex Gold has increased by more than 45% to date after Hamas attacked Israel on October 7, 2023.
How to trade with the help of data?
For instance, let’s discuss the Non-farm payroll data released on September 6, 2024. It is typically released on the first Friday after the month ends with a monthly frequency.
Data Print: The actual number was 142k against the forecast of 164k. This data measures the change in the number of people employed during the previous month, excluding those in the farming industry. If the actual number is greater than the forecast, it is good for the currency and negative for Gold, and vice versa. In the above example, the actual number was less than the forecast, which was positive for Gold. As a result, Gold rallied more than 3% the following week and more than 6% this month to date. It’s important to track this data regularly as it provides insights into the world economy and helps you make better trading decisions.
Now that we understand the major factors that affect gold prices, let’s discuss how to trade Gold using one of the most popular technical indicators, the RSI.
RSI (The relative strength indicator)
The RSI (Relative strength indicator) is one of the most popular indicators used by traders worldwide. It is available for free on almost all charting platforms. The RSI compares the relative strength of price advances to price declines over a specific period. The most commonly used periods are nine and fourteen days.
The main use of RSI
The RSI is mainly used to measure the momentum of an asset’s price movements. It is often referred to as a momentum indicator, and it measures the strength of price trends on a scale from 0 to 100. This tool assists traders in determining whether an asset is overbought or oversold, which could indicate a potential trend reversal or continuation in the market.
What is an overbought zone?
If the market is very bullish, an RSI reading of 80 is considered overbought, while in normal market conditions, a reading of 70 is considered overbought. As shown in the image below, whenever the RSI went above 70, it struggled to stay above it, and prices corrected. If there is strong fundamental news, the RSI reading can go above the 90 level. It’s important to backtest and forward-test the strategy in order to master it
What is an oversold zone?
In a very bullish market, an RSI reading below 40 can be seen as oversold, while in a normal market condition, a reading below 30 is considered an oversold level. As shown in the chart below, whenever the RSI dropped below 30, it did not stay at the lower end for long, and the prices rebounded sharply.
RSI is a technical indicator and a broad topic. You can trade any asset with RSI using divergence, such as bullish and bearish, hidden divergence, etc. However, it is crucial to understand the basics first.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the GoldSilverReports.com)
