Gold trading is just like Forex trading if you use a separate tool. A gold trading strategy can involve a combination of simple, emotional, or technological analysis. Keep reading to know about the different things you need to know about the correlation of gold with Forex and how companies like Fxtm use it to their advantage.
Effect of gold on AUD/USD and USD/CHF
First, let’s note that the U.S. dollar and gold don’t exactly align so well until we get into the specific relationship between the currencies and gold. Usually, much of the gold declines as the currency goes up, and likewise.
The key logic here is that buyers want to sell the USD in favour of gold at periods of economic unrest since gold is treated as a secure paradise.
Many variables, including supply and demand, economy, interest rates, speculation, and economic growth, influence currency. More precisely, considering the economic growth and exports become strongly connected to the domestic economy of a country, it is reasonable that certain currencies are positively associated with stock prices.
Positive Correlation of Gold with AUD/USD
Australia is the world’s third-largest source of gold, with around $5 billion worth of yellow treasure shipped out last year. Historically, the gold price and AUD/USD have had a good correlation. This secure relationship continues because Australia is the second-largest gold-producing nation in the world after China. And, this is the reason why Australia is known as the “medium of exchange”.
Gold is significantly connected with AUD/USD. AUD/USD gets higher as gold rises. AUD/USD falls as gold drops down. AUD/USD has traditionally had such a whopping 80 per cent connection to the gold price.
Trading Strategy of Gold and AUD
Trading in pairs is a common method during times of low volatility. There is a possibility of a pair trade approach with a close link between gold and the Aussie. Pair Trading refers to purchasing an asset separately and selling a similar asset at the same time. Pair Trading is a technique to lower some of the directional pressure of a dealer.
Pair trading increases the length of time and lowers the exchange risk but does not necessarily suggest a greater benefit possibility. So, trade options will be open if the pair’s partnership breaks down. If the link breaks when the gold price rises and the Aussie does not follow, trade openings are given by the Pair Trading Technique.
The short-selling of gold and the AUD/USD will leverage this difference while making gains simultaneously. A profit will be made once both the gold and the Aussie valuation return to the historical average.
The benefit of continuing on AUD/USD other than buying gold directly
The Aussie follows equivalent price averages to the gold price on a long-term basis. Many traders and investors even choose to go to AUD/USD for a long time rather than directly purchase gold contracts. There is a valid explanation for that. This is because gold does not deliver any rate of interest.
Also, you will be forced to pay an overnight rate if you go on a gold deal for a long time. The Aussie gives favourable swap value against the US Dollar. This means it pays you an overnight rate. This may be beneficial for a long-term trade.
Positive association of Gold with CHF
The currency of Switzerland, the Swiss franc, also has a close connection with gold. The explanation of why the Swiss franc moves alongside gold is that gold reserves support more than 25 per cent of Switzerland’s currency. The CHF gets higher as gold goes up. CHF gradually decreases as the gold goes down.
While different factors influence the price of gold than traditional forex currencies, many of the forex currency assessment rules still apply.
Forex traders should regard XAU/USD as a stable, safe place for their investing operations, as well as a possible source of benefit if they can efficiently monitor the price fluctuations of gold and develop a trading plan to capitalise on it. Hence, we hope the above article helped you know everything about gold’s correlation with forex.