Did you know that central banks have been quietly purchasing record amounts of gold this year? In total, global central banks have bought a record $15.7 billion worth of gold in 2019. Concerns of an escalating trade war between the United States and China is just one reason central banks are diversifying their reserves. And with China devaluing their currency in retaliation to Trump’s surprise addition of more trade tariffs, the price of gold has surged to a six-year high creating some very interesting trading opportunities.
In this article, we discuss the current US-China trade war situation, how that has affected gold prices and what could be next for the gold market in these unique and historic time. Let’s get started!
The US-China trade war intensifies
For the first time in 25 years, the US Treasury Department named China a currency manipulator on Monday 5 August. The action from US President Donald Trump came after China allowed its Chinese Yuan currency to weaken against the US dollar. Many analysts believe this was in retaliation to Trump announcing a new round of fresh tariffs starting on 1 September.
According to David Chui, the head of China equity strategy at Bank of America Merrill Lynch, the moves add to signs of a “protracted conflict between the two countries”. This, along with uncertainty around Brexit and further possible interest rate cuts from the US Federal Reserve has caused investors and central banks to search diversify their assets into safe-have markets such as gold.
Gold is considered a safe-haven asset as it can be melted down and turned into a form of money, among other reasons. Overall, the fundamental backdrop has led to the price of gold surging to a six-year high. This move could just be the beginning of a historic push back towards its all-time highs of $1,920 made in September 2011. Let’s take a look at the price chart of gold.
How to Trade Gold (XAU/USD)
One of the most popular ways to speculate on the price of gold is through trading it against the US dollar via the currency pair XAU/USD. Below is the long-term price chart of XAU/USD:
Source: Admiral Markets MetaTrader 4, XAUUSD, Monthly – Data range: from Dec 1, 1999, to Aug 6, 2019, accessed on Aug 6, 2019, at 10:36 am BST. – Please note: Past performance is not a reliable indicator of future results.
In the above price chart of XAU/USD, it is clear to see the historic long-term uptrend from 1999 to 2011. After a period of decline, the price of XAU/USD has been held in a period of consolidation from 2015 to 2019, as shown by the wedge chart pattern formation below:
Source: Admiral Markets MetaTrader 4, XAUUSD, Monthly – Data range: from Dec 1, 1999, to Aug 6, 2019, accessed on Aug 6, 2019, at 10:39 am BST. – Please note: Past performance is not a reliable indicator of future results.
The pattern above, denoted by the blue lines, is also known as a symmetrical triangle chart pattern. Now that the price has broken outside of the pattern to the upside, many traders will be looking to initiate long positions and use the lower timeframes to find possible entry points. For example, let’s look at the daily chart of XAU/USD:
Source: Admiral Markets MetaTrader 4, XAUUSD, Daily – Data range: from Jan 25, 2019, to Aug 6, 2019, accessed on Aug 6, 2019, at 10:43 am BST. – Please note: Past performance is not a reliable indicator of future results.
The blue line in the above chart shows the 20-day exponential moving average of price for XAU/USD. Moving averages are useful in trending markets as they not only help identify whether the market is in an uptrend or downtrend but they are also used as areas to initiate new positions.
For example, it is clear to see in the recent move higher in XAU/USD, price frequently bounced off the 20-day moving average line to rise even higher. Traders may then take it one step further and use price action trading patterns to identify possible turning points in the market which can help in identifying possible entry levels and stop-loss levels.
For targeting levels, traders may zoom out to take a bigger picture view:
Source: Admiral Markets MetaTrader 4, XAUUSD, Monthly – Data range: from Dec 1, 1999, to Aug 6, 2019, accessed on Aug 6, 2019, at 10:53 am BST. – Please note: Past performance is not a reliable indicator of future results.
If prices can stay above the breakout of the symmetrical triangle pattern, buyers will be eyeing the all-time high price level of gold which from the open of August represents the possibility of a 35% move higher. How will you be trading it?
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