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What Does the USDOLLAR Mean for Gold

What Does the USDOLLAR Mean for Gold

2013-12-12 19:00:00
Walker England, Forex Trading Instructor

Talking Points

  • Gold has dropped as much as 30% for the 2013 trading year.
  • The USDollar can give insight into commodity pricing.
  • Look to the trend and correlations to create an opinion for 2014.

Gold (XAU/USD) remains a popular tradable instrument as well as a popular commodity known for its store of value. While gold has traditionally been a slow moving asset, it has had some spectacular price swings since the 2008 financial collapse. The 2013 trading year has continued this trend with prices dropping as much as 30%, as displayed on the daily chart below.

With these sharp movements traders will surely be looking to take advantage of the gold market again in 2014. Today we will be looking at Gold and how to develop a trading opinion with the USDOLLAR for the New Year.

Learn Forex – Gold 2013 Trend

What_Does_The_USDOLLAR_Mean_For_Gold_body_Picture_3.png, What Does the USDOLLAR Mean for Gold

Gold and the Dollar

When pricing a commodity like Gold it is always important to view the denomination that it is traded in. Gold, (XAU/USD) is based in the US Dollar, and is quoted in Dollars per oz. This means the price of gold is directly impacted by the price of the USD. Below we see Gold compared to the Dow Jones FXCM Dollar Index(USDOLLAR). These two assets are inversely correlated, meaning they will head in opposing directions.

So how can traders use this information to their advantage? Well traders that may not have a clear outlook on Gold can use the USDOLLAR to form a trading bias. If you believe that the USDOLLAR will continue to rise in value, by way of correlation this would make you bearish on Gold. Conversely, if you think that the USDOLLAR is poised for a decline, you could also consider yourself bullish on Gold.

Learn Forex – Gold & Dollar Correlation

What_Does_The_USDOLLAR_Mean_For_Gold_body_Picture_4.png, What Does the USDOLLAR Mean for Gold

2014 Trading

Traders that are looking at trading Gold in 2014, will need to consider looking at the continuation of its current downtrend. After this year’s decline, an immediate bias would be to utilize a trend based trading plan to sell the commodity towards lower lows. Currently price is supported above the June low established at $1,180.15

If Gold fails to break a new low in the New Year, it could signal a period of consolidation or even a potential price reversal for the commodity. Traders can use the USDOLLAR to their advantage to spot a turn in the market. Current 2013 support on the Index remains solid at 10,000. A drop below this value would indicate a shift to USDOLLAR weakness, and likewise a strengthening in Gold.

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter @WEnglandFX.

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