Welcome to the next monthly correlation report in the series. Gold and the EUR/USD.
We know that gold is a timeless currency as it has been highly regarded as a precious metal since history started. As gold is priced in US Dollars, no doubt there should be a relationship of sorts that exist between them. This is thus the purpose of this report. To explore this relationship.
It is interesting once we compare the two charts. Here we can observe two possible factors affecting gold and the EUR/USD during the period of Oct – Dec 09.
1) The value of the US Dollar.
As we can see in all three months, gold generally follows the direction of the EUR/USD ( Or in a wider overview, the US Dollar ). This is normal since gold is priced in US Dollars. The stronger the US Dollar is, the more gold it can buy. However note that in the months of Nov and Dec 09, while the correlation is still there, the intensity differs. This brings us to point two.
2) Gold is also affected by demands of it.
We know that gold is one of the “safe harbors” when it comes to risk aversion.
In Nov 09, we can see the EUR/USD going up due to positive sentiments. Gold goes up in value too due to the weakening US Dollar. However with some signs of trouble brewing in the market, investors seek the safety of gold too and hence the price of gold was pushed higher and faster.
In Dec 09, troubles emerges in full and the EUR/USD dropped due to flights back to the US Dollar. One will expect that the gold dropped swiftly due to the strengthening US Dollar. The gold did drop but with a lesser intensity. Demands for gold due to risk aversion probably helped to lessen the pressure with regards to a strong US Dollar. This suggest that gold remains a top choice when it comes to stormy financial weather.
Gold is therefore indeed an important clue to watch when it comes to market developments and that is why it is one of the 3 clues i cover during my EUR/USD Daily Reviews. However due to the nature of the two factors above, understanding the correlation may be tricky at times.
Stay tuned for more and trade safely.