The close relationship between precious metal and the Forex market

The close relationship between precious metal and the Forex market

Precious metals are an important trading commodity. Anyone involved in commodities trading should keep a close eye on gold, silver, and platinum. But the foreign exchange market is closely connected to the trajectory of precious metals. They maintain a strong inversely proportional relationship.

Forex traders should be aware of this relationship. Watching precious metals will give traders good insight into market trends likely to occur.

Let's take a brief look at why precious metals and the foreign exchange market are so closely related.

How does trading precious metals work?

Precious metals are volatile, making them an excellent commodity to trade. Precious metals are consistently popular, a trend which doesn't seem to have an end in sight. Of course, not all precious metals are equal, and some are better performers than others.

Gold is known as the best precious metal for investment purposes. It is physically durable, malleable and can conduct heat and electricity. Its major uses are, of course, jewelry and currency. Trade originally relied on gold as a commodity, with it being used as currency. Although that is no longer the case, it is still closely connected to the Forex market.

Silver is another important commodity, but in a different way to gold. While silver is used for jewelry and currency, it also has a very practical purpose as an industrial metal. This makes price fluctuations in silver far more volatile than gold. Therefore, while gold does not so much work on supply/demand, supply/demand has an important impact on silver.

Platinum is also considered an industrial metal, with great demand coming from automotive catalysts used to reduce the harmfulness of emissions. Like gold and silver, platinum also has its place in jewelry, but less so.

Factors that affect precious metals and the Forex market

So, while precious metals and the Forex market are not directly connected, they affect one another, and the same events have an impact on them. These include:
  1. Financial concerns: gold especially is a safe haven for traders when other markets are weak. When a currency drops (especially the USD), gold tends to strengthen. Traders trade their dollars for gold, leaving the currency volatile and gold strong.
  2. Inflation: while currencies are subject to rates and inflation, gold retains its intrinsic value.
  3. War and politics: war and political upheaval heavily impacts currencies. This then sends traders running to gold and other precious metals which can be traded no matter what happens to the currency.

How does this help you?

This does not mean that Forex traders should exchange their currencies and move over to precious metals. On the contrary, precious metals are likelier to see sudden losses and are highly subject to the whims of global events.

However, watching precious metals can help you make decisions in the foreign exchange market. Since currencies and precious metals are so closely connected, fluctuations in the price of precious metals are a good predictor of what will happen in foreign exchange.

The versatility of the Forex market

Forex is influenced by many other commodities but, for the most part, there is plenty going on in the market itself. With more currency pairings than one trader can manage, there are always lots of options for trades.

Forex traders should keep an eye on precious metals, as an indicator for the foreign exchange market.

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