What is XAU/USD?
XAU/USD is the exchange rate that shows the value of Gold against the US Dollar. You can also find Gold traded with other currencies like XAU/EUR or XAU/GBP. This exchange rate tells you how many US Dollars you need to buy one troy ounce of Gold. For example, if XAU/USD is trading at 1640.00, it means that you need 1640.00 US Dollars to buy one troy ounce of Gold. So, when the price is going up, Gold is said to be appreciating or getting stronger and vice versa when the price is going down.
What are the most important XAU/USD charts to follow?
The most important chart to follow for XAU/USD is the US Real Yield. Real yield is the yield you get after adjusting for inflation expectations. You can see the Real Yield for different bond maturities like 2 years, 5 years, 10 years and so on. Generally, the 10 years is the one used as benchmark. Both Gold and the US Treasury Bond are considered risk-free assets and because of that they “compete” for the opportunity cost an investor will have depending on the real yield. Unlike Gold, the US Treasury Bond pays an interest. The interest the bond pays is called yield.
When real yields are expected to rise you will generally see XAU/USD going down and when real yields are expected to fall you will see XAU/USD rise. So, Gold has an inverse correlation to US real yields. These expectations come from various macro fundamentals but the most important one is the US Federal Reserve monetary policy. When the Fed begins a tightening cycle raising interest rates, real yields rise and XAU/USD falls. When the Fed begins a cutting cycle slashing interest rate, real yields fall and XAU/USD rises. Below you can see the very clear inverse correlation between the two.
Is XAU/USD a good pair to trade for beginners?
XAU/USD is basically a play on the expectation of where US real yields will go in the next 6/12 months. This makes it a relatively easy trade to identify as when you see the Fed starting to tighten monetary policy raising interest rates and thus real yields, then you can expect the XAU/USD price to fall as a consequence. The reverse is true when you see the Fed starting to cut interest rates which will make real yields to fall and the XAU/USD price to rise. So, if you want to make it easier to trade Gold, you want to focus on what the Federal Reserve is going to do and where US real yields will go. This will make the process simpler and give a good guide for your directional trades.
What session is best to trade the XAU/USD?
The best session to trade XAU/USD is during high liquidity times which comprises the European Session and the North American Session. That’s when you can see the most volume and action, and the spreads are tighter as a consequence of more liquidity. Moreover, since Gold is inversely correlated with US real yields, US economic reports that can influence the Federal Reserve actions going forward can have a big impact on the gold price. For example, let’s say that the inflation report (CPI) for US comes out much higher than expected. This will make the Fed to hike interest rates more, which will translate in higher real yields in the future and thus make the gold price to fall.
Is the XAU/USD an important pair?
XAU/USD pair is important for those wishing to capitalise on the actions of the Federal Reserve as the monetary policy course that the central bank will take will dictate the returns of Gold. You can look at Gold as pretty much the reflection of the expectations of future US real yields. Note though that the market is always forward looking, so the trends will remain intact unless the fundamentals will start to change and indicate a possible turning point in the Fed’s actions.
Will the XAU/USD go up or down?
In the current context of aggressive monetary tightening by the Federal Reserve, the XAU/USD price is more likely to continue on its downtrend. This is because the Fed wants higher real yields to make their monetary policy as restrictive as possible to fight a historically high inflation. As long as they stay the course, inflation expectations should remain anchored and even trend down, but as nominal yields rise due to the Fed tightening, real yields of course will keep on rising. The Fed’s response though will cause a bad recession and we can’t even exclude some kind of black swan event as the market has been used to low inflation and interest rates for more than a decade and such a big shock may very well break something down the road. So, we may expect sometime in Q2 or Q3 of 2023 inflation to coming back to the central bank target of 2% as growth is already slowing down and will slow down even more going forward. Once the market will see the Fed to cut interest rates to spur growth, XAU/USD should begin a new uptrend.
How popular is XAU/USD during financial crises?
A common misconception is that Gold is a safe haven during a crisis. As explained previously on the inverse correlation between Gold and US Real Yields, Gold is mainly a play on the real yields direction and opportunity cost investors face between buying Gold paying no interest and costing money to store it and US Treasury Bonds paying interests. In fact, during the 2008 Global Financial Crisis, Gold didn’t appreciate, it actually ironically depreciated on the day one of the biggest investment banks Bear Stearns narrowly avoided bankruptcy by its sale to JP Morgan. From that point Gold fell more than 33% even after the big investment bank Lehman Brothers went bankrupt. Gold bottomed in that yellow zone in the chart. That’s when the Federal Reserve started its first quantitative easing programme (QE), which sent real yields down a lot and Gold started its bull run.
Is XAU/USD still appealing to investors looking for a safe haven?
XAU/USD has not performed well during bad times. It’s not really a safe haven but an inverse play on the direction of US real yields. In fact, if you take the major risk events that happened in the last 15 years for example, you can see how Gold fell in 2008 with the Global Financial Crisis, in 2013 and onwards with the famous “taper tantrum” when markets sold off because feared the Fed ending QE and starting tightening monetary conditions, in 2018 with the US-China trade war and in March 2020 when the Covid crisis began. These events have one thing in common: US real yields went up a lot and in some of them even spiked up hard. A Gold investor’s main focus should be US real yields future direction as that will dictate the direction of the precious metal.
How to trade the XAU/USD?
The best way to trade in general is to have a fundamental idea for direction, which is generally based on macroeconomics such as central bank’s monetary policy, growth, inflation and so on, and technical analysis for risk management. For example, let’s say that you view the aggressive Fed as a headwind for XAU/USD. So, you will want to mainly take short positions. You also need to manage your risk though. Where can you enter in order to have a small risk exposure but a bigger profit potential? You can use technical analysis.
So, you open the XAU/USD chart and use technical concepts like support and resistance, trendlines, Fibonacci ratios, indicators and so on to decide where to open a trade. For example, in the chart below you can see how you could use the downward trendline with a previous swing level as resistance and a 61.8% Fibonacci retracement level for extra confluence. You could place a stop loss above that strong area, so your loss would be little and limited. Your target could have been much more than that. This way you can risk a little to make more than a little.
Where can I trade XAU/USD?
You can trade XAU/USD with a broker. Always choose a good, reputable, and regulated broker to avoid unnecessary problems. When you open a trading account with a broker, you will have to supply your KYC documents and, once approved, deposit money to be able to trade. Finally, you can use the broker trading platform to execute your trades. Most retail brokers let you also trade on MetaTrader 4 or MetaTrader 5, which are two of the most famous and popular trading platforms among retail traders. Most retail brokers offer CFD trading, although you can also trade XAU/USD via other derivatives like futures or options that trade on exchanges but are more expensive than CFDs. Moreover, you can trade or invest in Gold via ETFs (Exchange Traded Fund) like for example the SPDR Gold Shares (GLD).
XAU/USD correlation
The most important correlation you should know about is the one with US real yields. Gold “competes” with another risk-free asset, the US Treasury Bond. But while Gold doesn’t pay an interest to own (it actually has costs to store it), the US Treasury Bond pays an interest called yield. So, the opportunity cost of holding one of the two is given by the real yield. Real yield is nominal yield minus inflation expectations. When real yields go up, gold goes down and when real yields go down, gold goes up. If you want to trade Gold, this inverse correlation will be your polar star and give you the direction.
