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Forex: Gold and Currencies 101
10/03/2003 12:00 am EST
"Monitoring gold prices can provide significant insight into trends of the currency market," notes DailyFX, a sophisticated trading-oriented research service from Forex - the Foreign Capital Markets exchange. Here, the service explains the relationship between gold and various currencies, explaining how changes in one can impact the other.
"Gold is typically viewed as the principal form of money and the ultimate safe haven investment in times of economic instability and heightened geopolitical uncertainty. When there are geopolitical risks / uncertainty, gold prices tend to rally significantly. Gold has the following relationship with the currency markets:
Gold Rises, US Dollar Declines
"Gold has an inverse relationship with the US dollar. Usually confidence in gold means a lack of confidence in the stability of the dollar. Over the past 10 years, gold and the trade weighted US dollar has had an 80% inverse correlation. Continued increases in the price of gold indicate increasing lack of confidence in the dollar.
Gold Rises, Swiss Franc Rises
"The Swiss franc is also a safe-haven currency. One of the reasons for this reputation is that historically, the Swiss constitution mandated that every Swiss franc must be backed 40% by gold reserves. This has recently been repealed, but the psychological association of Swiss franc and gold still remains. In addition, Switzerland's inherent political neutrality draws international investors in times of geopolitical uncertainty. Therefore, as gold rises, the Swiss franc is expected to rise.
Gold Rises, Australian Dollar Rises
"Australia is the third largest producer of gold in the world. As a result, the Australian dollar has an 80% positive correlation with gold prices, as gold represents approximately $5 billion in exports for the nation each year. Strong commodity prices also benefit domestic producers. Therefore as gold prices rise, the AUD is expected to rise.
Gold Rises, Canadian Dollar Rises
"Canada is the fifth largest producer of gold in the world. The Canadian dollar has a 60% positive correlation with gold prices, therefore as gold prices rise, the Canadian dollar is expected to rise."
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