How Does Gold Affects the Forex Market?


Gold and Forex… Have you ever considered there might be a correlation between these two? 

It may seem unlikely if you are hearing about this for the first time but believe it or not, there IS a correlation.

And, SPOILER ALERT, Forex market and Gold mesh pretty well!

Ready to find out more and explore how Gold affects Forex market prices? Keep on reading.

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Understanding the value of Gold

First and foremost, Gold is one of the most traded commodities worldwide. Why?

Traders believe that gold reflects the condition of economic and political stability. 

During times of economic crises, traders and investors tend to run a mile from trading the $$$ and seek safe-haven assets a.k.a THE GOLD

However, in times of economic prosperity and political stability, the opposite is true. Gold investors seek higher profits in other, more profitable markets such as Forex. 

It’s price fluctuations majorly affect the 3 major currencies. i.e, USD, AUD and CHF.

Let’s take USD, for example.

Generally, when the US dollar goes up, the value of gold falls and vice-versa.

So where can you see how the value of Gold is changing in comparison to the USD. 

It’s pretty simple!

There is a very special Forex currency pair that includes Gold (XAU), and it is called XAU/USD.

The XAU/USD pair tells traders how many US dollars it costs to purchase one Gold Ounce. 

And hell, is this an interesting currency pair to trade! Ask any trader and let them tell you about the massive liquidity of XAU/USD.

Now, how does Gold affect major currency pairs in Forex?

Let’s explore. 

Gold vs AUD/USD

A picture speaks louder than words so let’s place Gold and AUD/USD side by side on the same chart.

gold

Can you see how they move together?

That’s because Gold has a positive correlation with AUD/USD.

This means that if the value of Gold goes up, so does AUD/UDS. 

If the value of Gold goes down, so does AUD/USD.

This correlation may be due to various factors, such as Australia being the third biggest gold-digger… sorry, gold producer worldwide, digging out more than $5 billion worth of the Goldie each year!

And historically, AUD/USD has had a massive correlation of 80% to the price of Gold!

80%!!! 

That’s a too big of a percentage for it to be a coincidence… 

However, for the sceptics out there (and we love that for you), let’s compare Gold to another major currency pair… Perhaps USD/CHF? 

Gold vs USD/CHF

Yup, that’s right. There is a correlation between the Swiss franc and Gold. 

But it is not free sailing like AUD/USD. 

In fact, Gold has a negative correlation with USD/CHF.

This means that if the value of Gold goes up, the value of USD/CHF falls down.

If the value of Gold falls down, the value of USD/CHF goes up.

Again, this may be due to a number of different reasons. One worth mentioning, however, would be the fact that over 25% of Swiss franc is backed by gold reserves.

One could say that Switzerland is the global hub for gold industry and most of the gold in the world passes through Switzerland.

Isn’t that amazing?

 gold Forex

And even if you are not interested in trading gold, it might be worth keeping an eye on it from time to time. You can check its current movements here.

In the meantime, just remember that Gold is inversely/negatively related to USD and positively related to CHF and AUD.

And the relationship between gold and major currency pairs is just one of the many that we will tackle throughout this level. 

In the next lesson, we will look at the relationship between Silver and Forex.

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