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.
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