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Why is gold a strategic element for traders?


In many ways, there are few assets more central to an investor’s strategy than gold. Whether you’re trading this asset directly or looking to use it as a measure of global economic sentiment, it can play a pivotal role in influencing investment decisions and providing a secure store of wealth.

This has much to do with gold’s well-earned reputation as a safe-haven asset, and one that typically outperforms the broader markets and enjoys growth during times of economic regression. Make no mistake; gold has risen during six of the last seven recessions that have affected the UK, which is just one of the reasons why investors flock to it during times of austerity.

In this article, we’ll look at the influence of gold in the financial market whilst appraising the strategies that can be used when trading this asset.

How gold responds during a recession?

In simple terms, the value of gold is not adversely affected by macroeconomic factors such as inflation and interest rates.

This means that it has the capacity to act as an hedge against inflation and retain its value during times of turbulence, which in turn increases the demand for the asset and sends its price soaring.

From a technical perspective, inflation often plays a key role in economic decline, as prices continue to outstrip wage growth and send the cost of living spiralling. During this time, currency values plummet and investors automatically begin to track the performance of gold, which provides a clear hedge and store of wealth that compensates for such volatility.

The current economic climate is also being impacted by a significant, long-term regression on commodity prices and currency values, with even the greenback trading in a depreciating range.

As a result, the demand for gold is steadily rising across the globe, with China among the primary drivers and increasing geopolitical tensions beginning to take their toll.

Assessing short and long-term strategies

One of the most popular ways of leveraging gold is through long-term trading strategies, which allow investors to profit from the visible trends that underpin the assets’ movement.

A long-term trading strategy requires investors to focus on the fundamentals that drive the price of gold, including supply and demand and real interest rates.

There’s often an inverse correlation between real interest rates and the price of gold, for example, so anyone with a long-term outlook should consider buying opportunities when the corporeal yields have fallen below 1%. This must be measured alongside other economic factors, whilst traders should also use platforms like Oanda to track and monitor key economic data sets.

From a short-term trading perspective, one classic method of leveraging gold involves a so-called “moving average crossover” strategy. This requires traders to buy gold in instances where short-term moving average crosses above a long-term alternative, whilst selling when the reverse trend is true.

This demands a greater focus on price movements and real-time market trends, rather than prioritising the underlying rules that govern the asset.

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