Currency & Commodity Correlations – Investors Flocking to Gold as a Safe Haven in Uncertain Times

Currency & Commodity Correlations – Investors Flocking to Gold as a Safe Haven in Uncertain Times
August 10, 2020 Market Traders Institute

Often, the values of certain commodities correlate very strongly with different currencies, and there is a significant link between the value of gold and the Australian dollar (AUD). Historically, as gold prices increase, AUD also climbs in value. Conversely, when gold prices drop so too does AUD.

The relationship between the U.S. dollar (USD) and gold makes this relationship even more pronounced. When USD falls in value, investors often turn to more predictable investments such as gold. Then, as the demand for gold increases, the value of USD drops, and this cycle repeats until a change shifts the commodities market in the other direction.

At that point, the USD increases in value, and investors tend to want more USD and less gold. By extension, the AUD also drops. But why does gold correlate so strongly with the AUD? Well, this relationship is based on the fact that Australia is the world’s second largest producer of gold in the world, ranking just behind China.

Additionally, Australia has an export economy, meaning the country exports more than it imports, and gold is its third biggest export after iron ore and coal. In 2018, gold represented 12% of the country’s exports, while iron ore and coal accounted for 20 and 19% respectively.

Due to the significant position of all these exports, many people consider AUD to be a commodity currency, and this shows no signs of changing any time soon. Australia has the world’s largest gold reserves — analysts estimate the country has 17% of the world’s total estimated gold reserves.

In light of recent events, many people have watched their portfolios become decimated. The generic advice is to ride out the storm and wait for stock values to return. However, most investors face numerous hits like this during their careers, and rather than feeling confident about their retirement, they worry as their nest eggs repeatedly shrink before their eyes.

There are ways to sidestep these risks and exponentially increase the value of your investments, but you need to be proactive. To get started on the right track, take a look at our current prediction.

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