The Commodities Connection | GOLD Part 1

FOREX GOLD

Gold price movements are important for currency traders to understand. Gold acts in many ways as a surrogate currency and a “safe haven” when money moves out of the dollar in response to geopolitical crises. But gold is also a commodity on its own, adding strength or weakness to currencies of countries that produce gold. South Africa, of course, is the leading producer of gold, but its currency, the rand, is not floating, so traders can look to the Australian dollar and the Canadian dollar for trading those currencies when gold patterns provide trading opportunities.

Gold price action can also be a misleading guide to the currency trader. In recent years, Gold has attracted a great deal of investment demand from exchange-traded funds (ETFs). In 2003, ETFs were buying 20 tons of gold, and this rose to 500 tons in 2005. The trader who looks at gold prices rising may interpret it as a reaction to the dollar, when it actually can be reacting as a function of investment demand. 

Figure 5.1 shows gold versus the U.S. Dollar Index (USDX).

 Central banks have an important role regarding gold. They hold gold as part of their reserves (see Figure 5.2). The world’s central banks have about 3.5 trillion dollars in

FIGURE Gold vs. the USDX.

reserves, and 15 percent is in gold. The key variable that can affect currency prices is whether a central bank will increase its gold reserves and thereby decrease its reserves of dollars or another currency. As a result, rumors of central banks increasing gold reserves can disrupt currency prices.

The idea that gold is important to currency moves is sound, but needs to be qualified and put in the context of world events. Sometimes gold acts as a store of value in times of crises. But the correlations between gold moves and currency moves provide a great deal of variation. The trader needs to be vigilant regarding what factors are moving gold.

At the end of the day, in the words of Phillip M. Hildebrand (member of the Governing

the Commodities Connection 35 Gold Reserves in USD billion Currency Reserves FIGURE  Evolution of World Official Reserves.

Source: Phillip M. Hildebrand, member of the Governing Board, Swiss National Bank. Board, Swiss National Bank), “the yellow metal continues to have a special significance for central banks.”