The Association Between Forex and Precious Metals

The Association Between Forex and Precious Metals
The Association Between Forex and Precious Metals
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Precious metals have a strong connection between their current prices and currency values in the foreign exchange market. Even though the world’s currencies aren’t based on the precious metals anymore, particularly gold, these metals still continue to impact the value of currencies.

One of the best examples of metals affecting forex prices was when Russian forces invaded Ukraine. Because of the turmoil in the country during that time, the prices of precious metals rose in fear of another major market downturn.

Apart from political strife that affects the global market, there are other things that affect the relationship of precious metals and the foreign exchange market. To illustrate the correlation, here are a few facts:

Imports and exports affect a country’s currency

Currencies are tied solidly to a country’s imports and exports. When a country is dependent on imported goods, its currency’s value will weaken. A country needs to be a strong exporter of goods in order for it to have a strong currency. Countries that have the capacity to export gold have a solid currency because the precious commodity adds value to its total exports. Today, the largest holders of gold reserves are the United States and Germany with 8,133.5 and 3,384.2 metric tons of gold respectively. The International Monetary Fund comes in third place, with 2,814 metric tons of gold.

Italy used to be a strong exporter of precious metals until its economy’s decline in 1998. Before 1998, Italy’s then-currency Lira was solid because it was backed up by its strong jewellery exports.

Precious metals during inflation

If a country is experiencing inflation, the natural reaction of investors is to buy gold. After all, gold can be traded in any country in case currencies completely lose their value.

Investopedia cites the April 2011 nightmare when investors feared the declining values of fiat currencies. During that time, the price of gold rose to $1,500 an ounce, meaning that there was very little confidence in the currencies being traded in the market, and predictions of the economy’s stability was bleak. The rule of thumb is when gold prices suddenly shoot up; currencies aren’t generally doing very well.

Ultimately, precious metals, particularly gold, will always be tied to currencies. Gold may decrease in price but it will always be the metal to look to in times of inflation, political unrest, and market uncertainty. In addition, its ability to make a currency strong is indisputable, making it a very important commodity to keep track of from time to time.

Just like Forex, you can trade precious metals based on where you think their value will be headed. Perhaps the only obvious difference between Forex and precious metals is the market where they’re being traded every day. FXCM states that more than $5 trillion is being traded on a daily basis, so finding a buyer when you’re selling and a seller when you’re buying is much easier than operating in other markets such as precious metals. With precious metals, you need to wait for a buyer first that will match your price before you can make a trade.

Trading on global commodities allows traders to profit from movements in prices of products. Like forex, and any other assets where investors put their money into, commodity trading can be undertaken online and works similarly to investing in stocks. The shift in prices for precious commodities are also due to fundamental factors that investors can see on the news, and technical factors that support the rise and fall of the prices. Like forex, the prices of commodities fluctuate heavily based on the sentiments of investors, as well as the current state of the global market.

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