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Trading Oil and Gold Can Improve Forex Success

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Over the past few years, the price of commodities has fluctuated significantly. Oil, for example, surged from $60 a barrel in 2006 to a high of $147.27 a barrel in 2008 before plummeting back below $40 a barrel in the first quarter of 2009 and rising to above $80 in 2011, currently sitting over 100 in 2014. Similar volatility can be seen in the price of gold, which hit $1600 an ounce in June 2011 and then a new high of over $1,800 an ounce a few months later in August 2011 before plummeting recently to 1150 in 2013 and running back up over 1300 in the beginning of 2014. With many countries around the world in recession, the trend of commodity prices can mean the difference between a deeper downturn and a faster recovery. Knowing which currencies are affected by what commodities will help you make more educated trading decisions.

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Trading Oil and Gold Can Improve Forex Success

  1. 1. Mange Forex Risk with Oil and Gold Provided by WorldWideMarkets www.worldwidemarkets.com Questions please contact: backoffice@worldwidemarkets.com
  2. 2. 2 | Manage Forex Risk with Oil and Gold WorldWideMarkets www.worldwidemarkets.com Manage Forex Risk with Oil and Gold Over the past few years, the price of commodities has fluctuated significantly. Oil, for example, surged from $60 a barrel in 2006 to a high of $147.27 a barrel in 2008 before plummeting back below $40 a barrel in the first quarter of 2009 and rising to above $80 in 2011, currently sitting over 100 in 2014. Similar volatility can be seen in the price of gold, which hit $1600 an ounce in June 2011 and then a new high of over $1,800 an ounce a few months later in August 2011 before plummeting recently to 1150 in 2013 and running back up over 1300 in the beginning of 2014. With many countries around the world in recession, the trend of commodity prices can mean the difference between a deeper downturn and a faster recovery. Knowing which currencies are affected by what commodities will help you make more educated trading decisions. Oil and the Canadian Dollar Oil is one of the world's basic necessities - at least for now, most people in developed countries cannot live without it. In February 2009, the price of oil was nearly 70% below its all-time high of $147.27 set on July 11, 2008. A decline in oil prices is a nightmare for oil producers, while oil consumers enjoy the benefits of greater purchasing power. This is a complete 180-degree change from the situation at the beginning of 2008, when record-high oil prices put a big smile on the faces of oil producers while forcing oil consumers to pinch pennies. Between the years 2006-2009, for example, the correlation between the Canadian dollar and oil prices was approximately 80%. On a day-to-day basis, the correlation can break, but over the long term it has been strong because the value of the Canadian dollar has good reason to be sensitive to the price of oil. It should come as no surprise that the price of oil actually acts as a leading indicator for the price action of
  3. 3. 3 | Manage Forex Risk with Oil and Gold WorldWideMarkets www.worldwidemarkets.com the USD/CAD, it's important to note that based on the historical relationship, when oil prices go up, USD/CAD falls and when oil prices go down, USD/CAD rises due to the inverse relationship of the currency pair. If you are looking for Oil charts or to trade Oil, you can find them in any of the WorldWideMarkets platforms with the symbol USOIL. Download a demo here. Gold-Usd correlation is yet another significant forex market indicator. Gold, denominated in terms of the U.S. dollars, directly impact price movement of many currency pairs. This strong negative correlation between dollar and gold makes gold a great forex hedging tool. Traders and investors can buy gold in order to hedge against the U.S. dollar weakness. When gold is purchased, the U.S. dollar is sold. Selling dollar will naturally devalue the currency as we have more supply of dollar. When gold is purchased, it's price rises because of demand for gold. So if you notice gold making lower lows then anticipate dollar gains and vice versa. Historically speaking, strong negative gold-Usd correlation has existed in near perfect as investors often hedge against the U.S. dollar weakness by buying gold. During major economic crisis, gold is a safer haven than the U.S. dollars from an American's perspective. On the other hand, the rest of the world considers the U.S. dollar as the safer haven. Specifically, foreign investors flock to bid up the U.S. government bonds, also known as Treasury bonds, Treasury notes or Treasury bills (T-bills). Due to the foreign capital flows in times of massive financial crisis, the U.S. Dollar gains considerably in comparison to all foreign currencies. As a result both the U.S. dollars and gold strengthens during a mass flight to safety. Once the relative economic crisis settles across the globe, the correlation gold up dollar down comes into effect again. If you are looking for Gold charts or to trade Gold, you can find them in any of the WorldWideMarkets platforms with the symbol XAU/USD. Download a demo here. Conclusion If you want to trade commodity currencies, the best way to use commodity prices in your trading is to always keep one eye on movements in the oil or gold market and the other eye on the currency market to watch how quickly it responds. Due to the slightly delayed impact of these movements on the currency market, there is generally an opportunity to overlay a broader movement that is happening in the commodity market to that of the currency market. Bottom line: You can use the movements of Gold and Oil as leading indicators for your Forex trades. Please keep in mind these are more useful for macro
  4. 4. 4 | Manage Forex Risk with Oil and Gold WorldWideMarkets www.worldwidemarkets.com movements as opposed to those who maybe looking to scalp or active trade. If Gold or Oil moves 50 cents in an hour don’t automatically believe that the CAD and USD will follow suit immediately. You should look for the larger overall trends and the higher time frame charts like the 4h, Daily, and Monthly for good correlations.

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