Gold has been popular in the world since a time when forex currencies didn’t even exist. People used to exchange gold in order to consume goods or services.
However, with time, gold value rose, and a cheaper medium of exchange was introduced in the market. But even today, gold has a massive influence on the foreign exchange market. And the precious metal has the power to change the entire currency market.
Being a reputable broker, Beirman Capital understands the importance of gold in forex trading. So, in this blog, we will explore the relationship between gold and forex and how gold affects the forex market.
How gold affects the forex market
Gold is a financial asset that remains in demand throughout history. The limited supply, global demand, and wide usability maintained gold value even during uncertainties and crises. In the forex market, XAU/USD is also the most volatile and highly liquid currency pair.
The rise and fall in the prices of gold make significant swings in the current market. Traders can make profitable trade decisions by watching gold market conditions. However, understanding the relationship between forex and gold is a must. So, let us see how gold affects the currency market:
Currency Dependency on Gold:
Countries generally hold a reserve of precious metals like gold and silver to maintain their currency value. Countries with the highest gold reserves have the strongest currencies.
The central banks’ currency revaluations and devaluation decisions are significantly affected by the gold reserves. Therefore, countries keep changing their gold reserves in accordance with market conditions. Also, traders used to watch gold and forex market dynamics to make informed buying and selling decisions.
Gold Import and Export:
Gold is a universally acceptable asset with a global supply and demand. The yellow metal is used to make jewellery, electronic gadgets, medicine, and several other products. Therefore, a large number of people buy and sell gold on a daily basis.
Almost every country focuses on gold’s import and export. Generally, countries with high gold exports and low imports have strong currencies; meanwhile, countries with low gold exports and high imports have weak currencies. So traders used to watch the gold import and export of a country to evaluate its currency.
Gold and Inflation:
Inflation is the decrease in purchasing power due to the fall in the currency value against goods and services. Inflation significantly causes a swing in gold prices that ultimately affects the foreign exchange.
Gold is a safe haven asset, so people start buying gold during inflation. Inflation and interest rate decisions also affect Forex trading and investment decisions. People can monitor and analyze these economic indicators by keeping a watch on the country’s gold market.
Generally, countries with positive correlations with gold prices benefit from the rise, while those with negative correlations benefit from the falls.
Gold and Forex Correlations:
Correlation defines the relationship between two assets in the financial market. There are two types of correlations: Positive and negative.
A positive correlation is when the prices of assets tend to move in the same direction, and a negative is when the prices of assets tend to move in the opposite direction. Gold observes correlations with most currencies. Let’s see the major forex and gold correlations:
Gold and USD:
Gold and USD’s inverse correlation is amongst the most important forex correlations. USD is the strongest currency, and the United States holds the largest gold reserve in the world. So naturally, the USD Dollar is highly reliant on gold.
Forex traders generally watch the prices of gold to predict the rise and fall of the USD. An increase in gold price tends to move USD in the downward direction; meanwhile, a decrease in gold tends to move USD in the upward direction.
Gold and CHF:
The Swiss Franc observes a significant relationship with gold. Both of these assets are also regarded as safe-haven assets. They tend to maintain value during economic uncertainty and unfavourable market conditions.
Gold and AUD:
Gold has a positive relationship with AUD. Australia is amongst the top countries with the highest gold reserves. In terms of gold exports, the country enjoys dominance in the market. So, the Australian economy heavily depends on gold.
Wrapping Up
Gold and forex are interrelated markets; to trade in one, you need to watch the other. The forex market is especially highly affected by gold. Considering the gold market’s dynamic is crucial irrespective of the currency you are trading.
Making informed decisions is important in the currency market to stay profitable. Thus, forex traders need to keep themselves up to date. Gold market knowledge will help you not only trade currencies but also trade XAU/USD.
So you can diversify your capital into different pairs, including the gold ones. However, whichever pair you choose, all are available at Beirman Capital. So open an account with us and start your forex trading journey today.
FAQs
What are the most popular gold and forex correlations?
Gold’s correlations with the United States Dollar, Australian Dollar, and Swiss francs are the most popular.
Is trading gold in forex profitable?
Yes, XAU/USD is a highly profitable pair for trading in gold in forex. Traders can even consider other currencies for gold trading.
Why do gold prices affect forex trading?
The paper or centralized currencies are generally valued against gold. The currencies of countries with large gold reserves and gold export are in higher demand. As a result, gold prices directly influence a currency’s balance.
Which currency is most correlated to gold?
The United States Dollar is highly correlated with gold. Both assets show a negative correlation with gold.
What is the impact of gold prices on USD?
Gold has an inverse relationship with the US Dollars. When gold rises, the USD falls, and when gold falls, the USD rises.
