gold forex correlation

Gold trading and Forex trading are two most sought trading markets by the investor. Investors and trade enthusiast are always tracking every movement of both these markets to multiply their investments. The movement tracking of the two markets is essential as there is a very close relationship between the two.

Why to track market movement?

Gold market and Forex market both offer immense investment opportunities to the investors and traders but the nature of these markets is unpredictable both in terms of benefits and risks. Thus to make the most of your investments in gold and forex trading market it is best to track the movement of these markets.

How to track movement of these markets?

The most effective and efficient way to track movement of these markets is by:

  • Understanding the gold and forex correlation between the two markets.
  • The correlation shall help you in hunting out more profitable investment opportunities and help you in making the best out of them.

The correlation between the gold and forex trading market can be easily understood and noticed because:

  • Both the markets i.e. gold trading market and forex trading market are hugely affected by similar factors namely socio – political scenarios, economic stability, demand and supply etc. In the event of unrest or war or change in political scenario investors will witness fluctuation in the commodity market and forex market.
  • Commodities namely Gold and Crude Oil have a huge correlation with the forex market more specifically because the economic growth of a nation is tightly connected to the exports of domestic commodities in the international market. So it is natural and obvious for currencies in the forex market to have a huge correlation with commodity prices.

Why Gold is an important trade commodity?

An important thing that every investor  must keep in mind is that gold is of profound importance. The reason for the rising importance of gold in the trade community is because:

  • Since ages gold has a huge impact on the value of various currencies across the globe.
  • Even today gold as a commodity has an ability to act as a substitute for currencies so without any doubt gold will continue to hold an important position while dealing in the forex market and
  • It is an effective tool that is used to control inflation.

Therefore, gold is an important commodity that traders need to keep a close eye on. One of the basic things that traders and investors  need to focus and understand is how commodities like gold correlate with forex i.e. various currencies across the globe.

What is Gold and Forex correlation?

For ease of trading worldwide the prices of gold are determined by currencies. Every currency has a different correlation and impact on commodity gold. It is usually observed that a fluctuation or change in the rate of currencies will impact positively or negatively on gold trading prices. As said above let us see how different currencies react to the gold trading market. Following is the study of the correlation between gold and various currencies. This study shall help you in understanding how forex and gold trading correlates.

US Dollar and Gold Correlation

There is an inverse correlation between the US dollar and the Gold market. The gold trading strategies can be based by overlooking the movement of the US dollar in the forex market. As per the historical statistics of the gold and forex correlation especially dollar and gold trading in recent years, it is observed there is an 80% negative correlation between the US dollar and Gold market i.e. the price of gold rose when the dollar rate fell and vis-a-viz. the main reason behind this inverse correlation is that investors tend to show more trust in gold investment when the dollar performance is lowering in situations like high inflation and economic trouble.

Swiss Franc and Gold Correlation

There is a direct positive correlation between the Swiss Franc and the Gold market. The market shows a positive trend in forex and gold correlation when the currency traded is Swiss Franc. There are 2 main reasons for this positive correlation namely the Swiss Franc is considered as safe haven for investment purpose by the investors and the Swiss currency reserves are backed by gold. Thus investors consider Swiss franc the safest investment currency while deciding their gold trading strategies

Australian Dollar and Gold Correlation

The Australian dollar and gold trading have a direct correlation because it is a known fact worldwide that Australia is one of the top 5 exporters of gold. So any change or fluctuation in gold price will directly impact the rate of the Australian dollar.

Let us understand the forex and gold correlation with an example. As stated above we now know that Australia is one of the top 5 exporters of gold and so the Australian dollar has a direct correlation with the gold and gold prices. Thus while interpreting the forex and gold correlation it is safe to say that the best gold trading strategy is to focus on the Australian dollar and its movements.

Alternatively, the gold trading and movements can be focused while trading in the forex market i.e. Australian Dollar dominated assets.

How to use Forex and Gold correlation trading strategies while trading?

Now we have understood how the correlation between gold and forex trading is affecting the movement of the underlying commodities in both the markets. This correlation can be utilized by traders and investors to make wise investment  decisions.

Following are certain ways in which the forex and gold correlation trading strategies can be used to make profitable investment decisions.

  • For traders and investors who have a higher appetite for profits can trade in both forex and gold market simultaneously. Trading in both markets increases the chances of higher returns.
  • The nature of simultaneous trading i.e. forex and gold trading depends on the financial goals and risk appetite of the trader or investor. For traders who wish to minimize the risk exposure can do it by trading two inversely influencing instruments simultaneously. Alternatively, for traders who wish to double the profits can do it by trading in two directly influencing instruments.

Therefore it can be said evidently that the best and yet simplest strategy for gold and forex trading are:

  • That the investor must first understand the forex and gold correlation
  • Next, understand how various factors affect and control the market movement and
  • Lastly, understand how currencies and commodities react to each other in event of market movement.

And, the best way for understanding gold trading tip or gold trading strategy is by:

  • Getting a complete understanding of currency and commodity correlation through analysis of past trends and
  • Understanding the nature of the underlying asset.

To sum it up it can be stated as a sound knowledge of the correlation between currency and commodity can help traders and investors in:

  • Predicting the market movements and invest wisely.
  • The study of past trend analysis of forex market and performance of the underlying commodity will help in understanding the movement of gold prices and currency rates in the gold and forex markets respectively and
  • Give a holistic view of the economic condition of various countries.

Bottom line

Thus the above article has shed some important light on the importance of understanding the forex and gold correlation and how traders can benefit by predicting market movement. This forex and commodity correlation proves beneficial in formulating gold trading strategies as it helps traders and investors to understand the impact of movement and fluctuation of underlying commodity i.e. gold or crude oil and its impact on the forex currency market.

Thus in this manner, investors can effectively plan their gold trading strategies or forex trading strategies and make the best of their investments.

Leave a comment

Your email address will not be published. Required fields are marked *


Get Connected
Follow Us

Get connected with us on social networks!


Quick Enquiry