The Correlation Between Forex and Gold

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Contributor, Benzinga
July 20, 2021

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Gold has been used as a medium of exchange and store of wealth for millennia. Some national currencies like the U.S. dollar have even been redeemable into gold in the past. Gold also has value as a hedge against inflation that can erode the value of paper fiat currencies over time. 

Having an understanding of the correlation between forex rates and the price of gold can help you better understand currency valuation shifts. This can in turn improve your ability to recognize good trading opportunities. 

Keep reading to find out more about the correlation between the price of gold and the forex market.

Is Gold a Currency?

In addition to its status as a precious metal commodity, gold is indeed a currency and has been assigned the International Organization for Standardization (ISO) currency code XAU. Gold’s spot prices or forex gold rates are commonly quoted versus the U.S. dollar, euro or pound sterling as XAU/USD, XAU/EUR or XAU/GBP respectively. You can trade spot gold via most online forex brokers

Gold was also historically used to back paper currencies like the U.S. dollar and the Swiss franc. Furthermore, the post-WWII Bretton Woods system of fixed exchange rates was based on the link of the value of the U.S. dollar to the price of gold. 

The U.S. unilaterally left the Bretton Woods system after the so-called Nixon Shock of 1971. This move eventually opened the door to the present system of largely floating exchange rates. 

Without having to worry about maintaining a gold standard or holding gold reserves, countries like the U.S. could freely print currency and manage interest rates based on economic conditions. It also became possible to trade gold openly once again. 

Since gold can help investors hedge against inflation because of its intrinsic worth as a commodity, its value is relatively immune to dilution and inflation-related depreciation. The gold market can also strengthen because businesses need it for production and when gold jewelry is in strong demand. 

In addition, currencies like the Australian dollar and the Canadian dollar can be affected by the price of commodities like gold that the country produces for export. Countries with a high volume of gold exports usually see the value of their currency shift to some extent along with gold price fluctuations. 

Foreign exchange rates also change with imports and exports. Countries that import more than they export typically see the value of their currency drop relative to other currencies, while net-exporting countries tend to see their currencies rise in value. 

As a relevant example, when gold goes up in value, the value of the currencies of gold-producing countries also rises. Also, if a country is a notable importer of gold, then its currency might drop in value when gold prices rise.

Is Gold a Stable Investment?

Gold has traditionally been used as a store of wealth investment and as a hedge against inflation and geopolitical uncertainty. Forex trading, on the other hand, involves operating in a volatile market more appropriate for short-term speculative trading than investing. 

While you can take advantage of price swings in the gold market, more conservative individuals tend to buy gold as an investment to diversify their portfolios and hedge them against inflation. This investment behavior does not mean that the price of gold is stable. Although the long-term trend for gold has indeed been higher in recent years, its price can still see substantial swings and downside corrections. 

If you plan on buying gold as an investment, you can buy physical gold or buy an exchange traded fund (ETF) that specializes in holding gold or making relevant investments. You can also use gold contracts for difference (CFD) or gold futures and options to take a view on the price of gold. 

Speculating on the price of gold using non-physical derivatives can be an easy way to trade gold, but it does differ considerably from trading physical gold. Physical gold has actual intrinsic value and can even serve as a hard currency in difficult times. 

How Much Research is Required?

As in any investment or trading endeavor, a certain amount of fundamental market research is required to trade or invest profitably in gold. Fundamental factors that might affect the gold market consist of geopolitical uncertainty, inflation rates, anticipated interest rate changes and discoveries of new gold reserves. 

Australia and Canada are the world’s largest gold mining countries after China and the Russian Federation, so you might want to research gold production conditions in all of those countries as part of your fundamental analysis of the gold market. Furthermore, since gold represents a significant export commodity for Canada and Australia, the price of gold can directly affect the valuation of their national currencies in the forex market. 

Accurate timing is one of the cornerstones of profitable trading in any market. If you plan on doing research to support your gold or forex trading activities, then you can review economic reports and watch the progress of current geopolitical events. It also makes sense to learn about technical analysis to help improve your timing and make more profitable trades. 

Also, gaining an understanding of which industries employ gold in their products and what new gold-using products are likely to become popular could provide additional depth to your long-term research. Performing detailed fundamental analysis helps give you an edge in both the forex and gold markets, which can in turn yield more profitable trading or investment results over the long term. 

Best Gold Buying Platforms

Brokers that support gold trading vary with respect to their commissions, leverage and minimum deposits required, so make sure you know the particulars of any broker you decide to use. Each broker also has its own list of supported gold trading platforms. Below find Benzinga’s picks for the best gold trading platforms. 

  • Birch Gold Group
    More Details
    Best For
    Gold buying education
    Overall Rating
    securely through Birch Gold Group's website
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  • Vaulted
    More Details
    Best For
    Low transaction fees
    Overall Rating
    Read Review
    securely through Vaulted's website
    More Details

Best Online Forex Brokers

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  • Forex.com
    More Details
    Account Minimum
    $100
    Pairs Offered
    80+
    securely through Forex.com's website
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  • CedarFX
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    Account Minimum
    $50 USD
    Pairs Offered
    55
    securely through CedarFX's website
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    CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and based in St. Vincent and the Grenadines.

  • IG Markets
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    Account Minimum
    $250
    Pairs Offered
    87
    securely through IG Markets's website
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  • AvaTrade
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    Account Minimum
    100 EURO
    Pairs Offered
    50+
    securely through AvaTrade's website
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  • Pepperstone
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    Account Minimum
    AUD$200 or equivalent
    Pairs Offered
    60+
    securely through Pepperstone's website
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  • HYCM – Forex
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    Account Minimum
    $100 USD (or equivalent)
    Pairs Offered
    69
    securely through HYCM – Forex's website
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  • SimpleFX Forex
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    Overall Rating
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    securely through SimpleFX Forex's website
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  • eToro Forex
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    Account Minimum
    $50 USD
    Pairs Offered
    47
    securely through eToro Forex's website
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    eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.

Gold and Forex Correlation and its use in Trading

Changes in the price of gold tend to most strongly affect the so-called commodity currencies like the Canadian and Australian dollars. Keeping an eye on the gold market when trading pairs that contain those 2 currencies, therefore, makes good sense. Also, a general weakness in the U.S. dollar usually results in a rise in the price of gold in U.S. terms and vice versa. Since geopolitical uncertainty, inflation and global interest rates tend to be the principal drivers of gold’s price, it would make sense to watch those fundamental factors when trading gold or the relevant commodity currencies. 

Frequently Asked Questions

Questions & Answers

Q
What is Gold Forex?
A

Gold is a hard currency, and the ISO symbol for spot gold is XAU. Gold can be traded against most other currencies in the forex market as part of a currency pair. Gold also has a quoted exchange rate when traded against national currencies like the U.S. dollar, euro or pound sterling. For example, XAU/USD refers to the price of gold quoted in U.S. dollar terms as a currency pair, while XAU/EUR refers to gold quoted in euro terms.

Q
Will Gold Prices Fall?
A

The long-term trend for the price of gold has been upwards over the past century. Also, since inflation generally tends to remain positive over time, the price of gold will probably continue to rise overall in the foreseeable future. Gold is also an industrial metal with many uses in technology and jewelry, and that substantial underlying demand for physical gold seems likely to persist. With that noted, many factors contribute to the price of gold, and gold prices can dip occasionally, so properly timing your entry into the gold market can be crucial for success as a gold trader or investor.

Read also: BEST GOLD PENNY STOCKS

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