Explores how the forex markets interrelate to gold, oil, the Dow, and commodities.
Currencies, Commodities and Intermarkets
An important dimension of understanding forex markets is the relationship between currencies, commodities, and other markets. This kind of analysis is known as inter-market analysis. For the beginning trader it’s important to be aware of some relationships that are followed by the “big boys” and professionals. In this section we will
focus on some fundamental relationships between currencies and commodity markets.
U.S. Dollar and Gold
The headlines on January 15, 2004, tell the story: “Gold plunges, as U.S. dollar rebounds.” Gold futures fell more than $13, and money flowed into the U.S. dollar against the other currencies. It’s appropriate that gold and currencies seem to be forever in a see-saw. After all, the modern era of floatable foreign exchange started on August 15,
1971, when the U.S. ended the era of the U.S. dollar tied to gold. Gold remains a way for assessing global sentiment about the U.S. dollar The following chart shows this relationship between the U.S. dollar (USDX) and gold.
The chart makes clear that gold vs. the U.S. dollar is often an inverse relationship and a useful guide to trading either. If gold is on an uptrend, forex traders can look to sell the dollar in a particular currency pair.
Finally, a recent research study shows the powerful historical correlation between gold and the USDX.
The EURO and Gold
The following chart shows that EUR/USD against gold has frequent periods where the price patterns are almost in exact sync with each other. Seeing this, you can conclude that both are acting as a haven for money coming out of the dollar. This correlation makes sense because a decline in the dollar makes an ounce of gold cheaper
in dollars, stimulating demand. A clear example of the relationship of gold and the euro occurred on July 7, 2004. Gold prices moved more than 2.5% to $402.95, and the euro also surged higher–All this in response to trader sentiment that U.S. interest rates would not be going up in the near term.
Oil and Currencies
The concept of valuing currencies as a cross of the currency and a commodity is seen in gold, but it is also valid for oil. Oil, after all, is the world’s “black gold.” Oil revenues are referred to as petrodollars. The value for the trader in understanding the oil/currency relationship is based on the fact that oil is the major resource for global economic
growth. In periods of cheap or stable oil prices, global economic growth is spurred and overall infl ation expectations are reduced. In times when oil prices become increasingly volatile, the impact is adverse on growth expectations. For example, if oil is expensive, the Japanese economy, which imports virtually all energy, can be severely impacted, causing a major decline in the yen. A sudden surge in oil prices presents huge discontinuities for the U.S. economy, infl ationary pressures, and increased prospects of recession. On the other hand, nations that have oil such as Britain can benefi t from the rise of this resource. However, a sudden increase in oil prices causes fear in the futures markets and a fl ight from the dollar to other havens that offer more stability. We have seen gold benefi t in OPEC oil crises.
Another key factor is the fact that oil is bought and paid for in U.S. dollars. As the dollar falls in value, the profi tability to oil producers declines. A higher price for oil generates more money to OPEC and may drain economic growth of the oil importing nation. But what OPEC does with the surplus revenue is a factor. New oil income in the OPEC nations has to be invested somewhere, and it will go to purchase more goods from the oil importing nations. In a real sense the Gross National Product of the oil producers is shared by the oil importers. Too high a price for oil in dollars may effectively slow the
global economy. The price of global grains would increase because shipping the grain requires oil. It is a balancing act of world dimensions. The fundamental fact is the interdependence between oil and the dollar is greater than ever.
Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com