Why gold is still such a hot commodity for foreign markets

Why gold is still such a hot commodity for foreign markets

Gold and Forex trading. You'll often hear the two mentioned in the same breath. Gold is a hot commodity, and when it comes to foreign markets, few are more prized. But what is the connection between gold and Forex trading?

Same patterns

The main reason gold and Forex trading are so connected is that the same factors affect each of them. These include a national and international politics, important events, and global sentiment.

This, however, does not mean that they go in the same direction. On the contrary, the rise of the USD for example, often signals a drop in gold prices.

The general rule is that gold is seen as a safe haven. When the markets are volatile, traders buy gold. Demand is increased and the price rises. Therefore, when the USD is falling, traders rush to gold. When the USD recovers, traders sell their commodities.

The importance of the dollar

The USD has the greatest impact on the gold price. This is because the gold price is dollar-denominated worldwide. The price of gold and the USD exchange rate have a negative correlation of about 80%.

There are another two reasons that the dollar is so closely correlated with gold:
  1. The strength of the dollar often represents market confidence. When confidence is high, the dollar rises. When it is low, the dollar falls. As mentioned, gold is considered a safe haven for traders. Thus, when the dollar is low, traders buy gold.
  2. When the dollar falls, the prices of other important currencies (including Euro and Yen) rise. The USD denominated gold is therefore cheaper, attracting investors.

Gold in 2016

Since the start of 2016, gold has been consistently rising. China's economic worries and fears of a global recession spurred the strengthening of the global safe haven. Although its rise has slowed down since then, including a short period of losses, it is on the rise once again.

The dollar has been weakening for the past few weeks against many major currencies, with investors believing a weaker US economy makes rate hikes are unlikely. Gold is very sensitive to rising rates, as is the Forex market.

Volatility and Forex trading

Gold thrives on market volatility, as does the opportunity for profits in Forex trading. The more fluctuations the dollar sees, the more chance of making big gains on cleverly timed trades.

And the dollar, of course, is never seen in isolation. The strength of the dollar is significant in the status of every currency, as it is the most traded in the world.

Forex trading in context

Most important is for Forex traders to remember that trading is done in a context. It is never more clear than when discussing the price of gold and its impact on the market. While the main consideration for Forex traders is the volatility of the Forex market, the correlation opens the door to commodities trading.

Commodities trading and Forex trading are not far off from one another. For the adventurous Forex trader, gold is a commodity that can be easily followed in the course of their regular trading activities.

Gold and Forex trading have long been connected. This is not expected to change anytime soon, leaving the door open for new, exciting ways to trade.

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