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Introduction to Trading Gold A FOREX.com Educational Guide

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educational guide

FOREX.com is a registered FCM and RFED with the CFTC and member of

the National Futures Association (NFA # 0339826). Forex trading involves

significant risk of loss and is not suitable for all investors. Spot Gold and

Silver contracts are not subject to regulation under the U.S. Commodity

Exchange Act. *Increasing leverage increases risk.

Contents

1 So everyone’s talking about trading gold.

What is it all about?

3 Factors that influence gold’s price

5 What is the correlation between gold and the U.S. Dollar?

7 Gold trading strategies

11 Trading gold with FOREX.com

So everyone’s talking about trading gold.

What is it all about?

Human beings have long valued and treasured

gold for its inherent luster and malleability. In

fact, gold has been used in human commerce

since the societies of the ancient Middle East

over 2,500 years ago, making it the oldest form

of money still recognized today. Gold’s long

track record as a store of value despite wars,

natural disasters, and the rise and fall of great

empires means that it is generally seen as the

ultimate “safe-haven” asset. While gold has generally held its value for

centuries, traders’ interest has waxed and waned

in recent years. From the early 1980s until the early

2000s, there was little interest in trading safe￾haven gold amidst the strong, stable economic

growth and high-flying stock markets. As a result,

gold generally consolidated between $300/oz and

$500/oz for twenty years, from 1982-2002

Interest in gold grew slowly through the 2000s

before exploding with the onset of the Great

Financial Crisis in 2008. Gold prices rose in

sympathy, hitting an all-time high above $1900 in

late 2011. In this guide, we will discuss the major

forces that drive gold prices, along with some

ideas for trading strategies and some of the most

common methods for trading gold.

Factors that influence gold’s price

Gold is one of the most difficult financial assets to

value. Gold is similar to a currency like the U.S. dollar

or the euro because it is durable, portable, uniform

across the world, and widely accepted; however, unlike

these more commonly traded currencies, gold is not

supported by an underlying economy of workers,

companies, and infrastructure.

In other ways, gold is more similar to a commodity

like oil or corn because it comes from the ground and

has standardized physical characteristics. Unlike other

commodities, though, the price of gold often fluctuates

independently of its industrial supply and demand 10%

In fact, only about 10% of

the world’s gold is used

in industry: primarily in

electronics, due to its

conductivity and anti￾corrosive properties.

90%

The rest of the world’s gold

is either made into jewelry

or held for investment

purposes. Because of this dynamic, the emotions and

behaviors of traders tend to drive major

trends in the yellow metal. With gold

more than any other asset, traders seem

to be polarized between diehard “gold

bugs” who believe that gold should be

worth $10,000 an ounce because central

banks around the world are debasing their

currencies and bearish traders who assert

that gold is a “barbarous relic” of the past

that should be worth closer to $100. As

the chart above shows, the gold bugs’

view developed into a bit of a mania back

in the mid- and late-2000s, though the

more recent drop suggests gold may be

losing some of its previous luster. GOLD AND U.S. INTEREST RATES Historically, one of the most reliable determinants of

gold’s price has been the level of real interest rates, or

the interest rate less inflation. If you think about it, this

relationship is straightforward.

When real interest rates are low, investment alternatives

like cash and bonds tend to provide a low or negative

return, pushing investors to seek alternative ways to

protect the value of their wealth.

On the other hand, when real interest rates are high, strong

returns are possible in cash and bonds and the appeal of

holding a yellow metal with few industrial uses diminishes.

One easy way to see a proxy for real interest rates in the

United States, the world’s largest economy, is to look at

the yield on Treasury Inflation Protected Securities (TIPS) One of the biggest points of contention for gold

traders is on the true correlation between gold

and the U.S. Dollar. Because gold is priced in

U.S. Dollars, it would be logical to assume that

the two assets are inversely correlated, meaning

that the value of gold and the dollar move

opposite to one another. In layman’s terms, it

takes fewer dollars to buy an ounce gold when

the value of the dollar rises, and it takes more

greenbacks to buy an ounce of gold when the

value of those dollars is lower.

Unfortunately, this overly simplistic view of the

correlation does not hold in all cases. The chart

below shows the rolling

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THE SCARLET IBIS BY JAMES HURST
Summer was dead, but autumn had not yet been born when the ibis came to the bleeding tree. It's strange that all this is so clear to me, now that time has had its way. But sometimes (like right now) I sit in the cool green parlor, and I remember Doodle. Doodle was about the craziest brother a boy ever had. Doodle was born when I was seven and was, from the start, a disappointment. He seemed all head, with a tiny body that was red and shriveled like an old man's. Everybody thought he was going to die. Daddy had the carpenter build a little coffin, and when he was three months old, Mama and Daddy named him William Armstrong. Such a name sounds good only on a tombstone. When he crawled on the rug, he crawled backward, as if he were in reverse and couldn't change gears. This made him look like a doodlebug, so I began calling him 'Doodle.' Renaming my brother was probably the kindest thing I ever did for him, because nobody expects much from someone called Doodle. Daddy built him a cart and I had to pull him around. If I so much as picked up my hat, he'd start crying to go with me; and Mama would call from wherever she was, "Take Doodle with you." So I dragged him across the cotton field to share the beauty of Old Woman Swamp. I lifted him out and sat him down in the soft grass. He began to cry. "What's the matter?" "It's so pretty, Brother, so pretty." After that, Doodle and I often went down to Old Woman Swamp. There is inside me (and with sadness I have seen it in others) a knot of cruelty borne by the stream of love. And at times I was mean to Doodle. One time I showed him his casket, telling him how we all believed he would die. When I made him touch the casket, he screamed. And even when we were outside in the bright sunshine he clung to me, crying, "Don't leave me, Brother! Don't leave me!" Doodle was five years old when I turned 13. I was embarrassed at having a brother of that age who couldn't walk, so I set out to teach him. We were down in Old Woman Swamp. "I'm going to teach you to walk, Doodle," I said . Why "So I won't have to haul you around all the time." "I can't walk, Brother." "Who says so?" "Mama, the doctor–everybody." "Oh, you can walk." I took him by the arms and stood him up. He collapsed on to the grass like a half-empty flour sack. It was as if his little legs had no bones. "Don't hurt me, Brother." "Shut up. I'm not going to hurt you. I'm going to teach you to walk." I heaved him up again, and he collapsed. "I just can't do it." "Oh, yes, you can, Doodle. All you got to do is try. Now come on," and I hauled him up once more. It seemed so hopeless that it's a miracle I didn't give up. But all of us must have something to be proud of, and Doodle had become my something. Finally one day he stood alone for a few seconds. When he fell, I grabbed him in my arms and hugged him, our laughter ringing through the swamp like a bell. Now we knew it could be done. We decided not to tell anyone until he was actually walking. At breakfast on our chosen day I brought Doodle to the door in the cart. I helped Doodle up; and when he was standing alone, I let them look. There wasn't a sound as Doodle walked slowly across the room and sat down at the table. Then Mama began to cry and ran over to him, hugging him and kissing him. Daddy hugged him, too. Doodle told them it was I who had taught him to walk, so they wanted to hug me, and I began to cry. "What are you crying for?" asked Daddy, but I couldn't answer. They didn't know that I did it just for myself, that Doodle walked only because I was ashamed of having a crippled brother. Within a few months, Doodle had learned to walk well. Since I had succeeded in teaching Doodle to walk, I began to believe in my own infallibility. I decided to teach him to run, to row, to swim, to climb trees, and to fight. Now he, too, believed in me; so, we set a deadline when Doodle could start school. But Doodle couldn't keep up with the plan. Once, he collapsed on the ground and began to cry. "Aw, come on, Doodle. You can do it. Do you want to be different from everybody else when you start school? "Does that make any difference?" "It certainly does. Now, come on." And so we came to those days when summer was dead but autumn had not yet been born. It was Saturday noon, just a few days before the start of school. Daddy, Mama, Doodle, and I were seated at the dining room table, having lunch. Suddenly from out in the yard came a strange croaking noise. Doodle stopped eating. "What's that?" He slipped out into the yard, and looked up into the bleeding tree. "It's a big red bird!" Mama and Daddy came out. On the topmost branch perched a bird the size of a chicken, with scarlet feathers and long legs. At that moment, the bird began to flutter. It tumbled down through the bleeding tree and landed at our feet with a thud. Its graceful neck jerked twice and then straightened out, and the bird was still. It lay on the earth like a broken vase of red flowers, and even death could not mar its beauty. "What is it?" Doodle asked. "It's a scarlet ibis," Daddy said. Sadly, we all looked at the bird. How many miles had it traveled to die like this, in our yard, beneath the bleeding tree? Doodle knelt beside the ibis. "I'm going to bury him." As soon as I had finished eating, Doodle and I hurried off to Horsehead Landing. It was time for a swimming lesson, but Doodle said he was too tired. When we reached Horsehead landing, lightning was flashing across half the sky, and thunder was drowning out the sound of the sea. Doodle was both tired and frightened. He slipped on the mud and fell. I helped him up, and he smiled at me ashamedly. He had failed and we both knew it. He would never be like the other boys at school. We started home, trying to beat the storm. The lightning was near now. The faster I walked, the faster he walked, so I began to run. The rain came, roaring through the pines. And then, like a bursting Roman candle, a gum tree ahead of us was shattered by a bolt of lightning. When the deafening thunder had died, I heard Doodle cry out, "Brother, Brother, don't leave me! Don't leave me!" The knowledge that our plans had come to nothing was bitter, and that streak of cruelty within me awakened. I ran as fast as I could, leaving him far behind with a wall of rain dividing us. Soon I could hear his voice no more I stopped and waited for Doodle. The sound of rain was everywhere, but the wind had died and it fell straight down like ropes hanging from the sky. I peered through the downpour, but no one came. Finally I went back and found him huddled beneath a red nightshade bush beside the road. He was sitting on the ground, his face buried in his arms, which were resting on drawn-up knees. "Let's go, Doodle." He didn't answer so I gently lifted his head. He toppled backward onto the earth. He had been bleeding from the mouth, and his neck and the front of his shirt were stained a brilliant red. "Doodle, Doodle." There was no answer but the ropy rain. I began to weep, and the tear-blurred vision in red before me looked very familiar. "Doodle!" I screamed above the pounding storm and threw my body to the earth above his. For a long time, it seemed forever, I lay there crying, sheltering my fallen scarlet ibis.

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