Gold is among the most valuable commodities on the globe. From the times of ancient Egypt to current gold has been the most valuable commodity in human history. A king's power used to be determined by the amount of gold in his vault.
But did you realize that gold directly influences the world's currencies?
Many individuals store gold as a hedge against inflationary pressures and as a means of exchange during turbulent periods when the value of paper fiat currencies may fall.
In this guide, we’ll talk about how goes gold affect different forex pairs.
Have you ever pondered the possibility of a link between these two? It may sound odd if you're hearing about this for the first time, yet there is a link between fiat currency and gold prices.
Spoiler alert: the currency market and gold complement one other rather nicely!
In times of crisis, a declining FX market always increases gold rates. Therefore, most analysts believe that the Forex market can be the reason for the rising gold price.
However, in the long term, both variables influence each other in the short run due to the connection between the forex market index and the price index of gold mining businesses.
There is clear evidence that during times of economic uncertainty, when equities prices fall, the price of gold rises and attention shifts to gold as a haven, so gold impacts the value and stability of currencies.
Gold symbolizes the state of economic and political stability. As a result, traders and investors seek safe-haven assets such as gold in times of crisis.
During times of geo political or financial upheaval, many people abandon paper money in favor of the relative safety of metal.
However, the converse is true in times of economic success and political stability. As a result, gold investors are looking for more significant returns in other, more attractive markets, such as forex.
On the other hand, gold has never been worthless, regardless of the economic cycle!
When the dollar's value rises, so does the value of gold. The value of the USD, on the other hand, diminishes when the price of gold increases. It demonstrates a significant rise/decline link between the value of fiat currencies and the cost of gold.
As the world's reserve currency, the USD was initially subject to the "gold standard." The phrase "gold standard" refers to fiat currencies (paper money) that are bound to the value of gold.
Let's go explore more regarding gold and forex.
So, where can you observe how the value of gold changes concerning the US dollar? The XAU/USD is a straight forward currency pair. The XAU/USD currency combination is an FX currency pair that compares gold (XAU) to the US dollar(USD). As a result, the pair is known as the XAU/USD.
The XAU/USD shows traders how much it costs US dollars to buy one ounce of gold. Although we can pair up any national currency with gold, the XAU/USD is the most commonly used.
Because the USD is the world's most crucial reserve currency held by central banks. As a result, gold prices frequently increase in USD on worldwide currency exchanges.
The XAU/USD currency combination is a fascinating one to trade! Any trader will tell you about the high liquidity of the XAU/USD pair. It is not unreasonable to refer to the XAU/USD as the gold standard of the FX market!
What effect does gold have on key currency pairings in Forex?
Australia seems to be well for being one of the world's significant bullion producers. It implies that the Australian economy is significantly reliant on how they export gold to the rest of the globe. So it's not a huge jump to realize that the country's desire to export gold influences Australia's local currency.
The AUD/USD has a positive association with gold. If the price of gold rises, so does the AUD/USD; if the price of gold falls, so does the AUD/USD.
This association is attributable to various variables, including Australia's position as the third-largest gold producer. Every year, Australian miners extract more than $5 billion in metal. Which is an attractive price, and it has an ongoing influence on the country's currency.
Historically, the AUD/USD has had an 80% association with the price of gold!
That's far too high a proportion to be a coincidence.
However, for those skeptical, let us compare gold to other essential currency pairs.
Yes, that's correct. The Swiss franc (CHF) and gold have a relationship. However, it is not as accessible as the AUD/USD. So, in reality, gold has an inverse relationship with the USD/CHF.
A negative correlation in asset pricing denotes an adverse link between two (or more) assets. For example, in the case of gold and the CHF, when gold prices rise, the USD/CHF value falls. Furthermore, the USD/CHF exchange rate increases as gold prices decrease. Consider this connection to be an "inverse gold standard."
Again, the USD/CHF/XAU link might be due to various factors. However, it is worth noting that gold reserves back the Swiss franc to more than 25%. As a result, the CHF fiat currency is dependent on a gold standard.
Switzerland might be considered the global gold industry's centre, with most of the world's gold passing through the country. As a result, the government imports gold, and gold backs up one-quarter of the country's currency.
Individuals who trade in the FX market can utilize gold as an extra instrument, allowing them to trade the precious metal alongside global currency fluctuations. Don't forget about gold while trading currencies!
It serves as a measure of economic success and a genuine safe-haven asset. Bullion significantly influences the FX market, particularly in nations that import, sell, and store yellow metal.
As previously said, gold has never been worthless! So, as you trade Forex, keep an eye on this dynamic market.