How to Trade Gold against World Currencies

Many traders are familiar with trading the price of gold against the USD. Gold has historically been seen as a store of value and has acted as a defensive play in times of economic, political, and financial crises. 

The gold versus USD trade has also historically acted as a proxy for the value of hard assets versus paper assets.  

Did you know that gold can also be valued in other currencies such as GBP, AUD, EUR, JPY and CAD?

While the US price of gold has tended to capture most of the attention, in recent years, interest in trading gold against other currencies has increased significantly. In particular capital flows in to and out of gold from EUR have increased significantly due to the sovereign debt crisis. 

In recent months gold had been weakening against EUR alongside falling European treasury yields indicating that fears of a financial meltdown had been receding. Recently, however, financial concerns in Europe have been rekindled by the tax on deposits component of the Cypriot bailout agreement, raising fears of a run on banks. These concerns appear to have reignited interest in the price of gold relative to EUR.

 

Gold Price in Eurodollars - Daily. Source: Bloomberg

Gold Price in Eurodollars – Daily. Source: Bloomberg

Gold has also been active against JPY in recent months as speculation of aggressive monetary easing has undermined the value of the paper currency relative to hard assets. 

You can capture the performance of gold against other currencies by combining a commodity trade with an FX trade. 

Trading Gold Versus USD 

The standard gold contract is priced in USD so you are trading gold against the greenback. When gold goes up against USD it means the value of USD relative to gold goes down. 

The gold contract can also be seen as a currency pair, XAUUSD, or how many USD it takes to purchase one ounce of gold. This tracks the performance of being long XAU and short USD. 

Trading Gold Against Other World Currencies 

If USD is the base currency in the FX pair (ex USDJPY, USDCAD, USDZAR) 

If you are bullish on gold, you could go long XAUUSD and long USDJPY. 

In FX terms: long XAU short USD and long USD short JPY.

The two USD positions cancel each other out leaving you with the performance of being long XAU short JPY         

 If you are bearish on gold, you could go short XAUUSD and short USDJPY. 

In FX terms: short XAU long USD and short USD long JPY.

The two USD positions cancel each other out leaving you with the performance of being short XAU long JPY 

If USD is the counter currency in the FX pair (ex EURUSD, GBPUSD, AUDUSD, NZDUSD) 

If you are bullish on gold, you could go long XAUUSD and short EURUSD. 

In FX terms: long XAU short USD and short EUR long USD.

The two USD positions cancel each other out leaving you with the performance of being long XAU short EUR. 

If you are bearish on gold, you could go short XAUUSD and long EURUSD. 

In FX terms: short XAU long USD and long EUR short USD.

The two USD positions cancel each other out leaving you with the performance of being short XAU long EUR.

 

 

 

 

About Colin Cieszynski

Colin Cieszynski, has been a Senior Market Analyst with CMC Markets Canadian office since 2007. Colin has provided trading insights to individual and institutional clients for over twenty years both as an analyst/strategist and investment advisor, with additional experience in investment banking and syndication. Colin tracks economic and market trends for Global indices, North American stocks, commodities and currencies utilizing both fundamental and technical analysis techniques. He has completed both the Chartered Financial Analyst and Chartered Market Technician programs.
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