With gold’s long history as a currency, it’s no surprise that this precious metal is traded on the foreign exchange market (prices are quoted in XAU). When significant market-moving events occur, the commodity frequently attracts a lot of attention as investors flee to gold as a haven. For example, during the COVID-19 outbreak, governments and businesses began shifting money into this asset to hedge against inflationary losses.
Its status as a safe-haven asset means its value often rises amid economic uncertainty or geopolitical unrest. Historically, when economies are badly shaken, investors move towards gold. Through forex trading, this fluctuation offers smart traders a chance to capitalize on the movement of specific currency pairs that correlate with XAU.
Historically, there has been an inverse link between gold and the US dollar. During economic uncertainty, investors have shifted their funds to gold instead of FX, and the opposite has been true during periods of rising investor optimism.
It’s crucial to note, however, that the USD is not the sole factor influencing its pricing. This implies that the association between gold and the US dollar is not always apparent and does not always move in lockstep. This is primarily because the US dollar is also regarded as a safe haven due to its function as a global reserve currency, which has caused the asset classes to move in the same direction.
Commodities are significant drivers of the Australian dollar. Due to Australia’s status as the world’s third-largest gold producer, gold and the Australian dollar are closely associated. The country annually contributes almost $5 billion in gold, and a spike in prices usually boosts demand for the Australian dollar.
Typically, if gold prices rise, so does AUD/USD, and if it drops, AUD/USD often follows. Over time, there’s been a notable 80% connection between AUD/USD and gold prices. Research has shown that when the gold price increases by 1%, the AUD/USD exchange rate usually grows by around 0.5%
The USD/CAD reflects the value of the US dollar compared to the Canadian dollar in the forex market. Often referred to as a “commodity currency,” the Canadian dollar’s value is linked to Canada’s rich natural resources, including oil, metals, and minerals. Given this, shifts in commodity prices, like that of XAU, can impact the Canadian dollar’s value.
Specifically, when the price of gold climbs, the USD/CAD usually descends. This is because higher prices can boost the demand for the Canadian dollar. So, a rise in XAU prices often leads to a stronger Canadian dollar relative to the US dollar.
One of the currency pairings with the most attention in the market is the USD/JPY. Intriguingly, there’s a negative tie between the USD/JPY and gold. When XAU prices surge, the USD/JPY often dips.
While Japan is a significant gold importer, this relationship isn’t entirely clear-cut in its reasons. However, one possible explanation revolves around the status both gold and yen hold as safe-haven assets. In turbulent market times, investors move towards secure assets like the yen.
Simultaneously, they often opt for the yen because it’s seen as a stable currency. This dual demand can result in gold prices rising and the yen getting stronger. Consequently, the USD/JPY rate may decrease in response.
The Swiss franc often follows the trend of gold since over 25% of Switzerland’s money is supported by gold reserves. Many people see the Swiss Franc as a reflection of this shining asset. So, if you want to track XAU, watch its opposite relationship with the USD/CHF pair. When Gold prices drop, the USD/CHF usually rises. On the other hand, when Gold prices increase, the pair tends to decrease.
The South African rand often mirrors gold trends because South Africa exports a lot of this asset. When XAU prices increase, the value of ZAR also climbs. This was especially noticeable when the rand was first introduced, and it continues today since gold accounts for around 15% of the country’s exports.
You can speculate on this correlation using the USD/ZAR pair, which has an inverse relationship with the price of XAU. So, when the price of gold rises, you can expect a decline in the USD/ZAR pair price.
Informed Trading Decisions
The goal of forex trading is to speculate the movement of chosen pairs accurately. With a good understanding of the relationship between gold and specific currency pairs, traders can better predict currency movements based on their analysis. For instance, a trader expecting an increase in XAU prices due to rising interest rates can consider going long on forex pairs that positively correlate with Gold.
If a trader has a long position on both gold and a positively correlated forex pair like USD/JPY, a decline in gold prices could result in losses across both assets. Armed with this information, traders can make decisions to hedge their bets or diversify their portfolios, protecting themselves from potential simultaneous downturns.
A well-diversified portfolio is less susceptible to market volatility. By being aware of which forex pairs are positively correlated with gold and which are negatively correlated, traders can construct a balanced portfolio. This allows them to potentially offset losses in one asset with gains in another, ensuring a more stable overall performance.
As a trader, you can enhance your understanding of market dynamics by considering gold-forex correlations. This all-encompassing view not only helps traders in specific trading situations but also improves their market knowledge.
Traders who wish to make educated trading decisions and successfully manage their risk would do well to familiarize themselves with the relationship that exists between forex pairs and gold. Some of the most widely traded foreign currencies correlated with gold are the US dollar, Japanese yen, Australian dollar, Canadian dollar, Swiss franc, and South African rand. Profitable trades can be made by watching these currencies and their relationship to gold.