Markets

Gold - FOREX Correlations Point Toward NZD/USD for Precious Metals Exposure

Gold has been receiving an increasing amount of attention recently as the metal soars to new record levels. But you don't have to trade gold to benefit from the metal's recent volatility. In fact, many of the popular currency pairs have been moving in tandem with gold, offering forex traders an opportunity to piggyback on the uptrend or bet against it, with the added benefit of trading within the world's deepest and most liquid market.

The following table includes the correlation between gold and the most popular currency pairs over various timeframes. A value close to +1 indicates a strong positive relationship between gold and the pair, while a value close to -1 indicates a strong negative relationship.

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Gold USD/CAD AUD/USD NZD/USD EUR/USD GBP/USD USD/JPY USD/CHF
15 Min, 3 Day -0.67 0.67 0.77 0.33 0.76 0.00 -0.68
60 Min, 1 Week -0.87 0.84 0.89 0.62 0.89 -0.03 -0.87
60 Min, 2 Weeks -0.74 0.86 0.84 0.69 0.74 -0.31 -0.85
Daily, 1 Month -0.83 0.94 0.96 0.91 0.67 -0.81 -0.95

Weekly Commentary : Broadly speaking, we saw the strong inverse correlation between the U.S. Dollar and gold maintained this week, but there was a bit of divergence between the various currency pairs. Some pairs saw their correlations with gold weaken, while other held firm or even strengthened.

As we have been explaining in our daily commodity market updates, while gold and the dollar are displaying a strong inverse correlation currently, that won't always be the case. In fact, if we just go back to August, we see that the gold-dollar correlation was strongly positive. That's why currency traders need to stay on top of the latest data to gauge which pair(s) to trade and how to trade them in order to get the best proxy gold exposure.

This week we are highlighting NZD/USD, a pair which saw its daily correlation with gold increase from 0.93 last week to 0.96. In the charts below you can see in graphical form this daily correlation over time, as well as the intraday (60 minute) correlation over time. As a commodity currency, the Kiwi is intricately tied to global growth and risk sentiment, thus it is not surprising to see that it often has a strong correlation with gold.

The pair we highlighted last week, USD/CHF, also saw its correlation strengthen week-over-week from -0.94 to -0.95. We continue to like this particular pair due to its consistency in tracking gold and due to the Swiss Franc's perception as a safe haven much like gold.

Lastly, we would note that we saw intraday correlations weaken almost across the board this past week. The two-week, 60-minute correlation between USD/CHF and gold, for example, weakened to -0.85 from -0.91. The same correlation between gold and GBP/USD weakened to 0.74 from 0.80, while that between gold and EUR/USD weakened to 0.69 from 0.90. Whether this is an indication that the Dollar-gold correlation is about to temporarily breakdown remains to be seen, but it definitely bears watching.

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Has the gold correction finally begun? Prices have fallen almost $43 since last week, but we haven't seen much action in ETF holdings. After soaring nearly 600,000 troy ounces a week ago, holdings fell 120,000 troy ounces this week. But if we take a look at the prior correction in gold, we see that prices actually led the decline in gold ETF holdings. Perhaps history is repeating itself.

Looking at the bigger picture, it still looks as if gold prices have gotten way ahead of the increase in gold ETF holdings. Since this current leg of the gold uptrend began back in July, holdings are up a mere 2.5 percent, while prices are up a much more significant 22.5 percent.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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