Correlative Commodities and the Currencies they Love

(eToro Blog)  Let’s start this by taking a look at the link between gold and the all mighty U.S. Dollar. On the face of it, they don’t seem to get along very well, nearly always moving in opposite directions – gold goes up, dollar goes down, dollar up… well you get the idea. In an imperfect world, that’s how it’s supposed to work because investors will dump their dollars in favor of gold during periods of economic uncertainty.

Though both gold and the U.S. Dollar are considered safe haven assets, gold has tended to retain its intrinsic value, and has the benefit of drawing investors during periods when they flee from the greenback as a result of an economic crisis there. Of course, in a perfect world, i.e. an absence of uncertainty and signs of growth, the reverse occurs.

Gold also has a strong correlative relationship with the Australian Dollar, moving generally in tandem with it. Australia is the world’s third largest gold producer, with more than $5 billion mined each year. A strong correlation might be putting it mildly; the AUD/USD pair, historically, has an 80% correlation with gold and that is clearly seen in the following chart.

The Swiss Franc also has a correlation with gold, though because the USD/CHF pair uses the dollar as its base price, the pair’s direction moves inversely with gold prices. Another reason the Swiss Franc moves in gold’s direction is because 25% of the Swiss Franc is backed by gold.

Oil also has a correlative relationship with certain currencies, specifically the Canadian Dollar. Canada exports nearly 2 million barrels a day to the U.S., and is the U.S.’s largest supplier. When oil prices are rising the Canadian Dollar, aka the Loonie, strengthens, thus there’s a direct relationship between the two.

Many of OpenBook’s most successful commodities traders understand the relationship between gold and oil and certain currencies, and use that to their advantage.

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