What comes to your mind when gold is mentioned?
And yes indeed! For the longest of time in history, gold has played a very important part in our society, culture and economy. Besides that, gold is also a very important factor when it comes to forex trading.
When Does The Price Of Gold Go Up Or Down And What Does It Mean For Forex Trading?
1) Gold can have an inverse correlation with the US Dollar. Gold is usually priced in US dollars and therefore, assuming a constant actual value of gold, the weaker the US dollar is, the higher the gold price will be. This is normal as since gold has it’s own value, it should rise when the currency it is priced in weakens. Similarly, if the US dollar strengthens, the price of gold will drop.
2) Gold is a typical safe haven asset when there is risk aversion or inflation runs amok. During periods such as geo political tensions, pandemics or economic crisis, the price of gold will often rise in value as demand increases. Gold is perceived as an asset that is able to stand the test of time and being valuable on it’s own. It is perceived to be something that will never be worthless.
3) Gold also acts as a reserve currency of many countries around the world. While their currencies may drop in value, gold will always be there as a hedge to such scenario.
Therefore when gold prices go high, something may be possibly wrong and investors may be getting some early protection. If indeed so, your forex trading plans should factor the possibility of a climate of risk aversion. Currencies of countries with riskier investment opportunities may decline in value due to a lack of demand.
Likewise when gold prices are low, it may indicate that things are going well and risk seekers are letting off their golds to seek high yield investments. When this happens, your forex trading plans should factor the possibility of a risk seeking climate where currencies of countries with riskier investment opportunities climb in value from demand.
The Bottom Line
Gold is an important asset to the world and for our forex trading plans. By monitoring it’s developments, we can possibly gain insights into the current market sentiment and possible currency developments. These insights will be a great leverage for our forex trading.
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