5 Points on Gold & its Relationship with Forex

5 Points on Gold & its Relationship with Forex

10:00 AM EST

Besides the falling popularity of Donald Trump’s golden hair, the real gold is trading near its five-year lows beneath $1,100/ounce and is down by roughly 40% from its 2011 peak of $1,900/ounce. Why is gold losing its value? Could we see further losses? Here are 5 important points on the matter.

1- Gold & US Dollar have an Inverse Relationship

One of the main reasons why this topic is important to forex traders is because gold prices typically have an inverse correlation to Ms. USA’s performance. When Ms USA aka US dollar is high and mighty on the forex dance floor, the demand for gold shrinks. Basically it’s as if there is room only for one star to shine. And with the Fed expected to hike interest rates before the end of the year, investors could keep dumping their gold bars in exchange for U.S. assets and the dollar.

Picking one of Ms. USA’s major forex dancing partners, let’s take a look at the USD/CAD pair which recently reached our bullish target of 1.30, breaking above the neckline of a long-term saucer pattern.

The pair has been consolidating in the past week but remains above key pivot points and the Ichimoku Cloud. But this could only be the calm before the storm ahead of the FOMC week. Market participants are very interested in gauging the FOMC’s temperature after several policymakers have hinted on optimism regarding the state of the economy and a chance of a rate hike in 2015. With some investors pricing in January 2016 as the most likely period for the first rate hike, any suggestion by Fed officials that a rate hike is more than just a theoretical possibility in September could prove to be a significant driver for a jump in the US dollar strength and therefore further drops for gold.

Suggested stops and limits*

Support Levels Turning Point Resistance Levels
1.1950 1.28 1.30
1.1450 1.22 1.37

2- Less Gold Demand during Low Inflation

Investors tend to stock up on the precious metal when price levels are rising. Conversely, periods of low inflation like we’ve been seeing in the past few months result to weaker gold demand.

3- China is Buying Less Gold

Another global economic factor on gold prices is the latest gold reserves data from China which revealed the world’s second largest economy has limited its purchases of gold bars. Even though the Chinese central bank reported a 57% increase in its gold reserves, analysts were concerned that this is just half of what was expected.

4- Husbands are Buying Less Gold

Zooming down to the consumer level also suggests a potential decline in gold buying, whether including husbands who buy gold for their wives, or retail gold investors in general. This could be a result of the recent stock market tumble which probably dampened financial confidence and led some to sell off their gold holdings.

5- Precious Metals, Commodities & Mr. Aussie could Continue Down

Gold has a positive relationship with other precious metals, as well as with commodity currencies such as Aussie dollar. They typically all go down together. Talking about crowd psychology! As I have covered in previous updates, we are likely to see further drops in Mr. Aussie prices. And as the Land down Under is massively dependent on its mining sector, this could only add on to the bearish pressure.

So if all these factors continue riding the same path as the past few months, we could expect further drops in gold prices and therefore stronger US dollar. However if say Mr. Aussie decides to go nuts and suddenly gain massive power, or if inflation starts to pick up, we should look into an alternative bias.

*Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.