How Does Silver Affect the Forex Market?

As we discussed in the previous chapter, the USD is negatively correlated with the prices of gold. So, what about silver? You guessed it: the USD is negatively correlated with silver as well.

Of course, the relationship is a bit more nuanced between the USD and silver bullion than with gold. The production and exportation of physical silver are much different than that of gold. However, it can still have a palpable impact on the foreign currency markets.

Read on to learn more about how silver prices, and other precious metal markets, can impact forex valuations.

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Precious metals and the USD

What do crude oil, corn, copper, platinum, and other precious metals have in common? They’re all commodities. And, as commodities, they exhibit a negative correlation with the US dollar (USD). Why? The reason is simple: most of the world’s commodities are quoted in USD.

Therefore, when the USD rises against other major currencies, commodity prices tend to fall. Given this dynamic, the silver price and gold price per troy ounce are poised to retrace.

It works the other way too! During the periods of USD downtrend, commodity prices tend to make huge gains. So, as the USD becomes devalued, silver prices are likely to rise. Although this isn’t always the case, it isn’t a bad way to represent silver prices in relation to the USD.

But, we always tell you to think positive! So, for the sake of this lesson, we will take our own advice and explore the POSITIVE correlations of silver to paper currency pairs.

To kick things off, let’s take a closer look at silver’s correlations with AUD/USD.

The correlation of Silver prices and AUD/USD

Before we dig deeper into silver and Australia’s entanglements, it is important to note that Australia is not only a top-three gold producer worldwide, but it’s a MASSIVE producer of physical silver too!

australia, silver, AUDUSD, forex

That’s a lot of silver, eh? You can only imagine the impact that such an amount has on the overall economy of Australia. To say the least, the global silver investment in AUS is nothing to sneeze at!

Before we go further, you’ll remember that the forex code for the gold market was XAU; for silver, it’s XAG. Accordingly, the key forex pair that addresses the global silver market is the XAG/USD.

Now, let’s compare the movements of the Aussie (AUD/USD) and XAG/USD over the past 15 years. Do you see any of the standard USD/precious metal correlations?

AUDUSD, weekly chart, forex
XAGUSD, weekly chart, forex

Their movements have been pretty similar over the past couple of years, wouldn’t you say? Can you spot the positive correlation between AUD and XAG prices?

Basically, as silver prices move up and down, so does the AUD. In fact, the correlation is very similar to that of the AUD and gold price. That’s why many view the AUD to be a viable safe haven investment alternative. Because the Aussie has a positive correlation to gold and silver price, it can be viewed as a proxy for these two precious metals.

Protect your Silver coins (and gold coins!) by watching the USD/precious metals correlations

Of course, the positive correlation between the AUD/USD and XAG/USD does not mean that AUD and silver will always move in the same direction. It’s important to remember that some days/months may be more defined than others.

For instance, if we take the same example from earlier, you can notice a certain degree of divergence between AUD and silver prices at the end of 2019. This was mostly caused by the repeated rate cuts of the Reserve Bank of Australia (RBA) which significantly weakened the AUD.

So, while the price of your silver bars may have held their value, the Aussie did not!

However, things had begun improving by the start of 2020 (well, between silver and USD anyway). In short order, the high degree of correlation between those assets had been restored. The same could also be said for the relationship between the USD and gold prices.

Invest in Silver or pass?

Now, why don’t you take a look at what that precious metal correlation between XAG and AUD is right now? You can get up to speed quickly here.

Is it time to boost your silver holdings as a safe haven investment? Or should you replace silver and stock up on the USD?

For all we know, you might be reading this article 43 years after it was published! No matter what, if you pay attention to the USD/silver bullion correlation, you can make a solid, informed decision.

Want to learn more about how Silver affects currencies?

As in all things forex, experience is the best teacher. To learn more about how the silver market affects currencies, screen time is your number one asset. Watching the ebbs and flows of silver prices is a great way to learn how precious metals can impact currencies.

So, the next time you trade, don’t forget about the silver markets! Pull up a XAG/USD chart and get to it!

On to the next lesson!

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