Understanding correlations is a great way for traders to form opinions on markets that they may previously not follow. The idea of a correlation is to take two seemingly different markets or assets and see how market price moves relative to each other. Even though gold is no longer used as a primary form of currency in developed nations, it continues to have a strong impact on the value of those currencies. Moreover, there is a strong correlation between its value and the strength of currencies trading on foreign exchanges.
Correlations between the world's most heavily traded commodities and currency pairs are common. For example, the Canadian dollar (CAD) is correlated to oil prices due to exporting, while Japan is susceptible to oil prices because it imports most of its oil. Similarly, Australia (AUD) and New Zealand (NZD) have a close relationship to gold prices and oil prices. While the correlations (positive or negative) can be significant, if forex traders want to profit from them, it is important to time a "correlation trade" properly. There will be times when a relationship breaks down, and such times can be very costly for a trader who does not understand what is occurring.
Gold market and forex market are concerned by the investors, because they have a relatively perfect, just, fair environment and more investment opportunities. There is a very close relationship between the two markets. However, the gold market and forex market are unpredictable with benefits and risks. Thus, if you understand their mutual influence and role, may be able to find more investment opportunities. The price volatility of the gold market and forex market is affected by the same factors, such as political situation, war, and unrest. If those events happened, the gold price and forex rate will be greatly affected.
Although the United States is the second largest gold producer, behind South Africa, gold is not normally moving in line with the US dollar. Rather they tend to maintain an inverse correlation. This is because in times of geopolitical uncertainty investors tend to move away from the US dollar to gold as a safety measure, as a “safe haven”. In forex, no currency is considered safer and more stable than the Swiss franc. Its political neutrality and the fact that 40% of its monetary reserves are backed by gold, give it an aura of safety during periods of uncertainty. For these reasons, the pair USD/CHF has a strong negative correlation with the gold price.
Correlations between currencies and commodities are not an exact science. Often correlations break down and may even reverse for extended periods. Traders must remain vigilant in monitoring correlations for opportunities. Correlation indicators or monitoring charts are two ways of completing this task. After divergences, waiting for the commodity and currency to align with their respective trends can be a powerful signal - yet traders must accept those divergences can last a long time. Relationships may change over time as countries alter exports or imports, and this will affect correlations.
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