Trading gold

On a trading platform gold appears as XAU/USD, quoted like a currency pair. XAU is the market code for gold, so XAU/USD at 2,500 means one troy ounce is worth about US$2,500.

It is not really a currency pair. EUR/USD contains two currencies; XAU/USD contains a metal and a currency. Brokers list it alongside forex because the quote format matches and because it moves on many of the same inputs - but the thing underneath is a physical commodity with a monetary history, and it behaves like one.

The one idea the whole market runs on

Gold produces no income. No coupon, no dividend, no interest. Hold it for a decade and you have exactly as much gold as you started with.

So the cost of owning it is everything you gave up by not holding something that does pay. When a government bond yields 5% and inflation is 2%, the real return on that bond is about 3% - and gold has to compete with that 3% while offering nothing. When the bond yields 4% and inflation expectations are 3.5%, the real return is 0.5%, and gold is suddenly giving up very little.

That number - the yield after inflation - is the real yield, and it is the single most useful thing to watch. Falling real yields tend to support gold. Rising real yields tend to pressure it.

Gold does not compete with inflation. It competes with what you could have earned instead.

One inflation release, followed through

This is the chain most gold commentary compresses into 'inflation up, gold up'. Here it is at full length, with the step that actually decides the outcome marked.

1. Before the release

   US CPI forecast

   3.0%

   Market expects

   Three Fed cuts this year

   XAU/USD

   2,500

   Everything in the price already assumes a 3.0% print. The forecast is not new information.

2. The number lands at 3.5%

   Actual CPI

   3.5%: hotter than forecast

   Expected cuts

   Cut from three to one

   Treasury yields

   Rising

   Inflation went UP. If the simple story were true, gold would rise here.

3. The response is what matters

   Nominal yield

   Higher

   Real yield

   Higher: rates rose more than inflation expectations

   Opportunity cost of gold

   Increased

   Because the Fed is now expected to hold rates high, interest-bearing assets got more attractive in real terms.

4. Gold falls

   XAU/USD

   Lower

   US dollar

   Stronger, making gold dearer for non-dollar buyers

   Headline

   "Gold drops despite rising inflation"

   Not despite. Because. The inflation figure triggered a policy expectation that raised real yields.

Reverse every step and you get the other case: inflation rises, the central bank is expected to sit still, real yields fall, gold rallies. Same input, opposite outcome, decided entirely in stage three.

The dollar, and why the relationship is not a rule

Gold is priced globally in US dollars. A weaker dollar makes it cheaper for anyone buying in euros, yen or rupees, which can support demand; a stronger dollar does the reverse. The two often move in opposite directions and traders quote this as though it were physics.

It is a tendency, not a law. In a genuine crisis investors can pile into both at once, because both are being bought as defensive assets rather than traded against each other. Anyone whose position depends on "dollar down means gold up" holding every single day will eventually find out that it does not.

Why gold's supply behaves nothing like oil's

Oil is consumed. Burn a barrel and it is gone, which is why inventories, production quotas and storage dominate the commodity markets.

Gold is not consumed in any meaningful quantity. Almost all of it ever mined still exists - as jewellery, as bars in vaults, as central bank reserves. Annual mine production adds a small fraction to an enormous existing stock, so a mine opening or closing barely registers. Recycling responds to price far faster than mining does.

That is why gold trades on monetary conditions rather than on supply and demand in the way copper or wheat do. There is no shortage of gold. There is only a question of what people want to hold instead.

Gold across our broker records

Gold is one of the most widely offered non-forex markets, but the contract underneath it varies far more than the ticker suggests.

• 60of 100 brokers list metals explicitlyMany of the rest carry gold inside a broader commodities listing.
• 100 ozthe common standard lotAt $2,500 an ounce that is $250,000 of exposure per lot. It is not a universal specification.
• 0.10lots for 10 ouncesOnly if your broker defines a lot as 100 ounces. Check before assuming.

This is the single most expensive assumption in gold trading: carrying a forex lot size across to XAU/USD without reading the contract specification.

Sizing a gold trade

The arithmetic is the same as any other market. What catches people out is the contract size, so it is written out here in ounces first and lots second.

Brokers with the tightest published spreads

Gold spreads are not directly comparable with forex spreads and vary a great deal by session, but a broker running tight pricing on its major pairs is generally running tight pricing across the board.

• IC MarketsASICCySEC+31:309.5/10
• PepperstoneASICFCA+51:5006.5/10
• FP MarketsASICCySEC+41:307.9/10
• TickmillFCACySEC+31:10007.8/10
• Fusion MarketsASICFSA (Seychelles)+11:5007.8/10

Published figures from each broker's own material, recorded in our database. Gold spreads widen sharply around US data releases regardless of the headline number.

Before trading gold

Most of these are questions about the contract rather than about the metal.

• What does one lot represent at this broker: 100 ounces, or something else?
• How many ounces am I actually exposed to?
• What are US real yields doing, not just nominal rates?
• Is CPI, non-farm payrolls or a Fed decision scheduled in the next 24 hours?
• Do I already hold other positions that would benefit from a weaker dollar?
• If I hold this over the weekend, can I accept the gap risk while the market is shut?

Common questions