How Falling Gold Prices Could Affect Forex Trends

In case you’re wondering why leprechauns are feeling glum these days, lemme tell you that gold is trading near its five-year lows beneath $1,100/ounce and is down by roughly 40% from its 2011 peak of $1,900/ounce. Is the precious metal in for more losses and what might this mean for forex trends?

First off, let’s take a look at the factors dragging gold prices lower. As discussed in the School of Pipsology, gold prices typically have an inverse correlation to the U.S. dollar, which means that a strengthening Greenback could reflect weaker demand for the precious metal. And with the Fed expected to hike interest rates before the end of the year, investors could keep dumping their gold bars in exchange for U.S. assets and the dollar.

Aside from that, gold is also usually treated as a hedge against inflation. In other words, traders tend to stock up on the precious metal when price levels are rising. Conversely, periods of low inflation like we’ve been seeing in the past few months result to weaker gold demand.

In addition to these macroeconomic factors, the latest gold reserves data from China revealed that the world’s second largest economy has trimmed its purchases of gold bars. Even though the Chinese central bank reported a 57% increase in its gold reserves, warning bells went off when analysts remarked this is just half of what was expected.

Zooming down to the consumer level also suggests a potential decline in gold buying, as the recent stock market tumble probably dampened financial confidence and led some to liquidate their gold holdings. Keep in mind that China overtook India as the world’s biggest gold-digger back in 2013, with gold and property being the top two investment options for its middle class market.

So what do all these mean for forex trends? Well, apart from leading to potentially stronger U.S. dollar rallies, the gold price slump could also mean losses for the Australian dollar. You see, the Aussie has usually been positively correlated to gold because the Land Down Under is heavily dependent on its mining sector. Falling gold prices mean lower revenues for mining businesses, which could translate to weaker export activity and a downturn in production.

AUD/USD 4-hour Forex Chart vs. Gold Prices

AUD/USD 4-hour Forex Chart vs. Gold Prices

As you can see from AUD/USD’s 4-hour forex chart against gold prices, the currency pair and the precious metal have been rising and falling in tandem so far this year. With that, another leg lower for gold could mean that the Australian dollar is in for a beating from its forex rivals.

To top it off, gold also tends to affect other precious metals and commodities. If gold is indeed in for a bear market like some commodity experts say, oil prices could also take a hit and we all know how that affects global inflation trends and central bank policies. On a brighter note, a rebound in gold prices could mean better days for the commodity currencies and overall forex risk appetite.

Summing things up, we’ve got the following factors weighing gold bars down these days:

  • Potential Fed interest rate hike
  • U.S. dollar strength during risk-off environment
  • Low inflation
  • Weak demand from China

In turn, gold price trends could impact the following:

  • Australian dollar
  • Commodities and other commodity currencies
  • Inflation and central bank policies