While this might actually fall under the jurisdiction of fundamental analysis, using gold as a gauge during currency trading can actually be a unique way to not only understand where a currency is headed price-wise, but also as a way to hedge your currency trading. This is because, historically, gold investing has been used as a way to keep up with inflation and add a layer of protection to a portfolio. This makes gold a great long term part of your investing strategy, but you might still be wondering how this applies to short term trading. Gold and gold ETFs can be a great way to see if a currency is actually getting the support that it needs from institutional investors and other customers.
For example, the price of gold futures has plummeted over the last 48 hours, dropping more than 20 percent of its worth per ounce. This is partly because people are seeing that some currencies are beginning to show more promise than they have in a long time. The United States dollar has been the big winner here. In fact, the USD has risen in the past day against each major currency. This includes a large 0.8 percent gain against both the Japanese yen and the Swiss franc. In regards to the other major currencies, the gains are a bit more modest, but the average hovers around 0.3 percent.
This is an indicator that people are pulling up their stakes and moving to a currency that has been time tested and profitable. This is not to say that the United States does not have economic problems. It’s just that the problems that the U.S. is currently facing are lesser than, say, Europe’s are.
Where does gold fit in here? The price of gold is often measured as an inverse of the U.S. dollar. Historically, when the dollar drops, people have flocked to investing in gold as a manner of preserving wealth. This seems to be true in reverse as well. When the dollar goes up in value, it could be because people are switching from gold to the dollar, thus creating more demand. Or, to look at in a different manner, the price of gold might be dropping because the dollar is stronger. Whatever the reasoning behind this give and take, the answer is obvious: the dollar and the price of gold have a strong, yet inverse, relationship. When gold rises, the dollar falls. When the dollar rises, gold falls. This doesn’t always happen in unison, so spotting a rising price per ounce of gold can sometimes be a good trading signal that you should drop your USDs and move your forex trading money into a safer currency.