Gold has been receiving an increasing amount of attention recently as the metal soars to new record levels. But you don’t have to trade gold to benefit from the metal’s recent volatility. In fact, many of the popular currency pairs have been moving in tandem with gold, offering forex traders an opportunity to piggyback on the uptrend or bet against it, with the added benefit of trading within the world’s deepest and most liquid market. The following table includes the correlation between gold and the most popular currency pairs over various timeframes. A value close to +1 indicates a strong positive relationship between gold and the pair, while a value close to -1 indicates a strong negative relationship. --------------------------------------------------------------------------------------------------------------------------------- Weekly Commentary: Gold – Forex correlations strengthened across the board this week, with intraday correlations in particular making a huge comeback. News flow was dominated by developments in the Irish debt crisis, which led to risk aversion across all financial markets. Some readers may recall that the situation in Ireland began to impact markets as far back as last week, but at that time the damage was limited to the Euro. The U.S. dollar continued to fall against other currencies, while gold hit a new record high. Thus, we saw the correlation between gold and EUR/USD weakened significantly, while that between gold and the other pairs held firm. But that was last week. This week EUR/USD continued to fall, but this time other dollar-rivals joined in the declines. Gold fell sharply as well. That has allowed the correlation between EUR/USD and gold to rebound notably. At the same time, gold’s correlation between other pairs strengthened even further. That being said, now is probably not the time to jump into EUR/USD for proxy gold exposure. The long-term relationship between the Euro and gold is highly unstable, and the fundamentals do not support a strong positive correlation. Gold is garnering support from the view that it is a safe haven against the debauchment of fiat, or “paper,” currencies. Like in the United States, monetary policy in the Eurozone is extremely loose, which leads to a weaker currency all else equal. Instead, traders should continue to look to the commodity currencies which are benefitting from much tighter monetary conditions. AUD/USD in particular looks compelling as it is bolstered by the highest overnight interest rates of all the majors, as well as the prospect of further tightening of monetary conditions in the future. The pair saw its daily correlation with gold strengthen to 0.79 from 0.77 last week, while the 60-minute intraday correlation rose to 0.84 from 0.66.
---------------------------------------------------------------------------------------------------------------------------------
Gold ETF holdings fell for the fourth time in five weeks, while gold tumbled almost $95 peak-to-trough from last week’s record level of $1424.60. Although prices have rebounded from the recent lows under $1330, we can’t help but wonder if the advance is getting long in the tooth. ETF holdings are near levels they were at back in July, but gold prices are $100 higher than they were at that time. Over the last several years we have observed an extremely strong relationship between these two variables, thus caution is warranted. Nevertheless, there is always the possibility that demand is coming from other segments of the gold market such as the physical investment side, which we cannot measure in real-time.
View the original article here
