Trading gold during election season: Should you buy high?

Gold has long been viewed as a haven asset, but what truly sets it apart is how geopolitical tensions, central bank activity, and real interest rates, influence its price movements. while many traders focus on broad principles that apply across asset classes, a more tailored approach to trading gold can provide distinct advantages.

Understanding gold’s role as a geopolitical hedge

When global tensions rise—whether due to conflicts like the Russia-Ukraine war or economic instability, investors flock to gold as a safer store of value. Unlike other assets, gold’s value tends to increase in times of heightened uncertainty because it is seen as a stable, tangible asset when fiat currencies and markets become volatile.

As a trader, you can capitalize on this by closely turning your attention from the charts to monitoring geopolitical developments. While it's true that political events affect all markets, gold is often the first to respond to instability. For instance, if you anticipate escalating tensions in the Middle East or further unrest in Eastern Europe, increasing your exposure to gold could provide a hedge against potential downturns in equities or currencies. This geopolitical sensitivity is something that sets gold apart from stocks, bonds, or commodities like oil or copper.

Central bank activity and its influence on gold prices

One of the more nuanced drivers of gold’s price is central bank activity. governments around the world, particularly in emerging markets, have been increasing their gold reserves, seeing it as a way to hedge against the dollar and other foreign currencies. In fact, central bank gold purchases reached record highs in 2024, becoming a major factor in the precious metal’s price surge.

Traders should pay close attention to reports on central bank gold purchases, particularly from emerging markets like China, India, and Russia. central banks are key market movers in the gold space, and their actions can drive sustained price increases. If you see central bank buying trends rising, consider adjusting your positions to align with this macroeconomic support.

This level of attention to institutional buying isn’t something traders typically need to monitor for other assets like stocks or even other commodities, but for gold, it’s essential.

Tracking real interest rates and gold’s sensitivity to inflation

Unlike most other assets, gold is uniquely sensitive to real interest rates, which are nominal interest rates adjusted for inflation. When real interest rates fall or turn negative, gold tends to rise. This relationship is based on opportunity cost: when real interest rates are low or negative, holding non-yielding assets like gold becomes more attractive.

For traders, this means watching not just for federal reserve rate hikes or cuts but also for inflation data. Many investors focus too much on nominal rates, which can lead them to miss key moves in gold. If inflation is rising faster than rates are increasing, the real rate declines, creating a bullish environment for gold. Using this strategy, you can anticipate gold’s price movements based on how inflation and interest rates interact—something not applicable to every asset class in the same way.

The significance of seasonality in gold prices

Gold exhibits seasonal price trends that traders can leverage to optimize entry and exit points. For instance, gold prices tend to decline in September and October, largely because of lower demand from institutional buyers and general market correction cycles. However, demand typically picks up in the fourth quarter, driven by the holiday season and festivals, particularly in countries like India, where gold purchases surge during the wedding season.

To make the most of these seasonal trends, you could plan to buy gold during historically weaker months like September and October and sell during stronger months like January or February. This type of seasonality isn’t something you’ll find in every asset, but gold, in particular, shows these patterns quite reliably. Using this data-driven approach can help you avoid the pitfalls of buying at the wrong time and ensure you’re taking advantage of recurring market behaviors.

Choosing between physical and paper gold

Another consideration unique to gold trading is deciding whether to invest in physical gold (such as bullion or coins) or paper gold (futures, ETFs, or mining stocks). While paper gold is easier to trade and offers liquidity, it does not offer the same protection as physical gold in times of extreme financial crisis or systemic risk. In such situations, physical gold may hold its value better, as it’s a tangible asset that is less susceptible to market manipulations or liquidity crunches.

For long-term investors seeking a true hedge against systemic risks, physical gold can offer peace of mind that paper assets can’t. However, this comes with storage and insurance costs, so it’s essential to weigh the pros and cons based on your investment horizon and risk tolerance. Deciding between physical and paper gold is an asset-specific dilemma, as the question of physical versus paper holdings doesn’t typically apply to other commodities or stocks in the same way.

Checking the charts

Gold (XAUUSD) is currently under pressure, but it's holding above crucial support levels. The market sentiment is somewhat bearish as the price has retracted from recent highs. However, the overall trend remains within an uptrend, though there are risks of a downward correction.

Key points:

• Price Action: XAUUSD is trading within a triangle pattern. Currently, it's holding above the upper boundary of this triangle, which coincides with the crucial support area of $2470-$2480 (USD).
• Support & Resistance: The key support level is at $2470-$2480. A break below this could lead to further downside towards $2450 or lower. On the upside, resistance lies at the recent high of $2532. A break above this could open the door for a move towards 2,600 USD.
• Indicators: Technical indicators are showing mixed signals. Some oscillators are in overbought territory, suggesting a potential pullback. However, moving averages are still generally supportive of the bullish trend.
• Market Sentiment: Market participants are awaiting US employment statistics at the end of the week, which could impact the USD and consequently gold prices.

Managing risk with gold-specific strategies

Risk management is critical for all asset classes, but for gold, there are specific strategies traders can implement to manage exposure. One of the most effective techniques is using stop-loss orders tied to key support levels in the gold market. Gold tends to react sharply to macroeconomic events, so setting stop-losses below critical price points can protect your capital from sudden downturns. For example, if gold is trading at $2,500 per ounce, you might set a stop-loss just below a key support level, say $2,480, to avoid a sharp drop if sentiment turns negative.

Another risk management strategy involves diversifying across both gold and related assets like silver or mining stocks. While gold often leads the precious metals market, silver and mining stocks can provide additional upside or downside protection, depending on market conditions. This form of risk management allows you to hedge within the gold sector itself, rather than relying entirely on external assets like stocks or bonds.

Conclusion

XAUUSD is at a critical juncture. The price action in the coming days, particularly around the $2470-$2480 support level, will be crucial in determining the short-term direction. Traders should closely monitor price action and upcoming economic data for further clues.

Gold presents traders with unique opportunities that don’t apply to most other assets. its sensitivity to geopolitical events, central bank activities, real interest rates, and seasonality makes it a dynamic and valuable asset in times of economic uncertainty. By paying close attention to these factors, traders can better time their entries and exits, manage risk effectively, and capitalize on gold’s potential as a safe haven.

Whether you’re using physical gold as a long-term hedge against systemic risk or trading paper gold in response to macroeconomic events, understanding these gold-specific strategies will give you an edge in navigating this complex market. While the broader principles of asset trading still apply, gold requires a nuanced approach that acknowledges its unique position in the global financial system. with the right strategies in place, you can protect your portfolio and potentially profit from gold’s continued rise.