Trading System: USD & Gold Correlation

Jon — Fri, 14 Mar 2008 03:48:46 +0000

Exploring the correlation between the U.S. dollar index (major currencies) and Gold (iShares Comex Gold).

Theory
It is widely known that historically there is an inverse relationship between the price of Gold and the USD. So, what happens when one of the two does not respond as expected to a move in the others price?

Method
If there is a gap of more than 2% difference between the movement in prices of the two commodities we expect that gap to be closed the following day.

Example
01/05/2007: Gold Down 2.45%, U.S. Dollar Index Up 0.22%. Difference = 2.22%
It looks like gold has overdone it compared to the U.S. Dollar Index movement, so we expect gold to drop tomorrow to close the gap.

Results:

01/05/2007
Gold Down 2.45%, U.S. Dollar Up 0.22%,
Expectation: Gold Up Tomorrow
What Happened = Gold Up 0.55% (Profit)
Running Profit = 0.55%

01/12/2007
Gold Up 2.39%, U.S. Dollar Down 0.30%,
Expectation: Gold Down Tomorrow
What Happened = Gold Down 0.32% (Profit)
Running Profit = 0.87%

01/23/2007
Gold Up 2.29%, U.S. Dollar Down 0.11%,
Expectation: Gold Down Tomorrow
What Happened = Gold Up 0.20% (Loss)
Running Profit = 0.67%

02/21/2007
Gold Up 3.04%, U.S. Dollar Down 0.07%,
Expectation: Gold Down Tomorrow
What Happened= Gold Down 0.13% (Profit)
Running Profit = 0.80%

02/27/2007
Gold Down 3.65%, U.S. Dollar Down 0.50%,
Expectation: Gold Up Tommorrow
What Happened = Gold Up 1.11% (Profit)
Running Profit = 1.91%

03/02/2007
Gold Down 3.31%, U.S. Dollar Up 0.03%,
Expectation: Gold Up Tomorrow
What Happened = Gold Down 1.05% (Loss)
Running Profit = 0.86%

08/16/2007
Gold Down 2.30%, U.S. Dollar Down 0.12%,
Expectation: Gold Up Tomorrow
What Happened = Gold Up 0.80% (Profit)
Running Profit = 1.66%

09/06/2007
Gold Up 2%, U.S. Dollar barely moved,
Expectation: Gold Down Tomorrow
What Happened = Gold Up 0.67% (Loss)
Running Profit = 0.99%

11/15/2007
Gold Down 2.78%, U.S. Dollar Up 0.69%,
Expectation: Gold Up Tomorrow
What Happened = Gold Down 0.30% (Loss)
Running Profit = 0.69%

11/20/2007
Gold Up 2.87%, U.S. Dollar Down 0.38%,
Expectation: Gold Down Tomorrow
What Happened = Gold Down 0.44% (Profit)
Running Profit = 1.13%

We were right on 6 out of 10 trades, taking home 1.13% profit for the year. While this certainly isn’t a big amount, the fact that we only had our capital tied up for 10 days counts. Another thing to look at could be whether a stop could be used to reduce our loss on days we’re wrong.

Forex Investors price in 50 basis point cut

Jon — Tue, 29 Jan 2008 06:33:35 +0000

Gold has slipped a little lower as market players anticipate the Fed’s upcoming interest rate decision. Yesterday’s rally above $930 USD has no doubt caused some profit taking, with other investors positioning themselves in case the anticipated 50 basis point cut from the Fed does not eventuate. Investors remain uncertain as to how much assistance the US central bank will offer the struggling stock market.

Forex investors have already priced in a 50 basis point cut to the value of the USD. Investors expect a 50 basis point cut will see an increase in the value of gold, while a lesser rate cut could see a correction in the price of precious metals.

With economic data today pointing towards a slowing economy with growth in private sector unemployment, there is concern that the 50 basis point cut stock market investors are hoping for may not happen.

While a falling stock market has been proven to consistently boost the value of gold, the precious metal could find itself under pressure as investors and funds are forced to close profitable positions to cover losses elsewhere.

Silver hit a 27 year high yesterday at $16.79 per ounce, with some investors cashing in on profits.

It is expected the Fed will announce its interest rate decision around 7:15 pm GMT.

iBlogForex » Gold

Trading System: USD & Gold Correlation

Forex Investors price in 50 basis point cut