Australian Dollar (AUD) and Gold

Everyone loves gold - how can you not love it? It's metal, shiny and makes pretty cool jewelry. Besides that, gold is used in many, many applications like highly conductive wiring, reflective coating, and dentistry - you should check out Big Pippin's new grill!

In the financial world, gold is viewed as a safe haven against inflation and it is one of the most highly traded commodities. Okay, so how does all of this tie into Forex trading? Great question! To answer that, we'll take a look at the Australian Dollar.

For many traders out there, trading the Australian Dollar is just like trading gold. Australia is one of the world's largest producers of gold and it exports comprise over 50% of commodities, including precious metals.

These commodities account for a large portion of Australia's Gross Domestic Product; so many traders watch the rise and fall of commodity prices, especially gold, which can influence the direction of the Australian Dollar. Let's take a look at a comparison chart of gold and the "Aussie:"

This is a monthly chart that compares the price movement of gold and the AUD/USD all the way back to January 1980. As you can see, the two's movements were virtually the same, and from January 1980 to about January 2002 one can view gold as a leading indicator to AUD/USD.

The "red stars" above show major turning points in gold. These turning points seemed to occur before major turning points in AUD/USD. This relationship changed around 2002 as gold and AUD/USD movements were practically the same until gold shot up in value in 2005 to 2006.

Just as we learned with oil and USD/CAD, traders can watch gold prices to get an extra edge in their analysis of AUD/USD as gold movements can give possible clues to where AUD/USD is headed. For those who can't trade gold directly, AUD/USD's strong correlation to gold makes a great substitution. You can trade AUD/USD in the spot Forex market as a proxy for gold, which is traded in the futures market.