Gold and exchange rates.

Currency correlation is one of the key aspects that is widely used in Forex trading, but at the same time, there are other options for the relationship between exchange rates, for example, with the price of gold.

Gold and exchange rates—two exchange-traded instruments—have always had a close relationship. This has allowed this factor to be used to forecast trends in currency pairs and prices for this precious metal.

The main factors influencing this relationship are the country's economic dependence on the price of gold and the position of a particular currency in the global foreign exchange market.

The price of gold primarily influences the currencies of its major producing countries, such as Australia, which produces an average of 300 tons of gold annually. Clearly, a significant rise in the price of this metal will significantly increase the inflow of funds from its sale. Furthermore, increased confidence in gold itself leads to a strengthening of the currency, which is fairly well backed by it.

However, it should be noted that not all currencies of gold-producing countries behave like the US dollar. Sometimes, other, more powerful factors can come into play.

For example, investment outflows, in which case we're talking about the temporary or permanent storage of investors' available funds. An individual or company with significant capital always tries to protect it from inflation, keeping it in the most liquid products that can be quickly sold—in other words, gold or major global currencies. Therefore, a decline in the price of popular currencies triggers a rise in gold.

This usually happens as follows: a series of media reports about the weakening of the US dollar appear; the stronger the news, the more precipitous the decline. Most players in both the forex and interbank markets are trying to get rid of a weakening currency, but they need to exchange it for something. There are two popular options: gold and another currency. In our situation, the other currency could be the euro, Swiss franc, or pound sterling.

But what if the alternative currency is also trending downwards ? Then the only option is to invest in gold.

To determine the relationship between the price of gold and the exchange rates of major currencies, simply open a chart of the XAUUSD currency pair and several other instruments involving the dollar or another currency in your trading terminal. Then, compare the charts for the same time period. Based on these conclusions, we can determine the correlation sign (positive or negative) and the reaction time—whether gold rises first after the currency, or vice versa.

Gold is a rather complex trading instrument, so novice traders are advised to refrain from using it initially.