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Gold and oil prices have recently tumbled to multi-year lows, prompting speculations of another global inflationary slump. If you’re scratching your head and wondering what commodities have to do with forex trading, then you gotta review our School of Pipsology lesson on Intermarket Analysis!

Now let’s take a look at how the commodity-forex correlations are holding up…

Oil vs. USD/CAD

Oil vs. USD/CAD Weekly Forex Chart
Oil vs. USD/CAD Weekly Forex Chart

WTI crude oil prices dipped below $42/barrel this week, reaching levels not seen since ’09. At that time, the global economy was still reeling from the effect of the financial crisis and Bieber fever was just heating up (Coincidence? I think not!). Back then, USD/CAD had been trading below the 1.2800 key resistance level, which the pair already breached last month.

Could this be a sign that oil is in for a much deeper slump? Possibly. For one, oil cartel hotshots at the Organization of the Petroleum Exporting Countries (OPEC) are not looking to reduce production anytime soon while trying to edge out the competition from U.S. shale producers, leading to an oversupply of oil and putting more downward pressure on prices. It doesn’t help that the demand side of the equation is hinting at a potential downturn as well, with the ongoing economic slowdown in China likely to weigh on oil and energy-related imports.

The silver lining to all this gloom and doom is that we’ve just recently witnessed how an oil price slump affected global economic data and central bank action. It might be too early to start mentioning the D-word again but it could be worth reviewing how inflation trends and monetary policy biases fared earlier this year.

Gold vs. AUD/USD

Gold vs. AUD/USD Weekly Forex Chart
Gold vs. AUD/USD Weekly Forex Chart

If there’s one thing to remember about commodities, it’s that their prices tend to move in tandem with each other as well. Indeed, misery loves company as gold also fell to record lows earlier this week due mostly to falling demand from India, the Middle East, and – surprise, surprise – China.

The precious metal has actually been selling off since last month when China revealed that it added fewer than expected gold bars to its reserves. The selloff worsened when a report from the World Gold Council revealed that jewelry demand in India fell by 25% while the UAE indicated a 22% decline. To top it off, the Chinese central bank’s decision to keep devaluing the yuan is making gold imports more expensive in the local market, possibly adding to the 5% drop in jewelry sales in the country.

Gold’s positive relationship with AUD/USD has still been going strong, as the forex pair hasn’t left the precious metal’s side during its ups and downs for the past few years. After all, Australia is the world’s third largest gold producer so the price of bling does have a direct impact on the country’s revenues. With that, further declines in gold could spur more weakness for the Australian dollar.

Gold vs. U.S. Dollar

Gold vs. U.S. Dollar Index Weekly Chart
Gold vs. U.S. Dollar Index Weekly Chart

Gold is also usually treated as a hedge against inflation, which means that rising price levels could spur a gold rush while falling price levels could lead investors to dump the precious metal. Now the prospect of a Fed rate hike in September could put a lid on inflation so it’s no surprise that commodity traders are veering away from gold in anticipation of monetary policy tightening.

A quick look at the weekly chart of the U.S. dollar index shows that the currency is still stuck in consolidation, possibly because forex traders are waiting to see whether or not the next U.S. jobs release could seal the deal for a Fed rate hike. Another leg higher for the Greenback could mean more losses for the precious metal, which also seems to be losing its shine as a safe-haven asset these days.

What’s your take on these commodity price trends? Do you think we’ll see more risk-off moves and another global inflation slump? Don’t be shy to share your thoughts in our comments section below!