A professional approach to trading in the Forex market
Abe Kofnas is the president of an educational Web site for traders of the forex market - Learn4x.com.One of the fundamentals of understanding the global economy and changes in exchange rates - this is the role of gold.Trade in gold is rarely seen as a trading currency.However, there are some important relationships between gold and currency traders to the forex market should understand.
Adam Hamilton is a private investor and founder of "Zeal LLC", providing financial information and consulting services.Hamilton previously worked as an auditor and consultant with the six largest accounting firms.The
company "Zeal LLC" analyzes the market in terms of opposites, and tries
hard to apply the lessons of market history to the current market
action for the efficient trade.
Abe Kofnas: Why gold is important for currency markets? Adam Hamilton:
Gold is important for currency markets, because gold is the ultimate
form of money and the de facto standard, which measured all currencies. People engaged in trade of about six thousand years, and in most of our trading history, the ultimate form of payment was gold. Gold is very popular all over the world, has a high intrinsic value and completely interchangeable. This is an ideal money in many ways.
While mankind has tried many other forms of money throughout the
history of trade, people are always, ultimately, irresistible attraction
We used everything from cows and sea shells to today's national paper
currencies, with the development of money, but gold still retains its
primacy as the final form of money. Gold experienced the formation and decline of empires and governments, wars, revolutions, famine, hyperinflation, etc. Gold withstood every natural and man-made disaster in history, and it still shines strongly and proudly. Today, in commercial transactions mostly involving the so-called "paper money", ie currency depreciated government contracts, which have no intrinsic value. If you remove all tinsel, the value of paper money in the long run, there is nothing more than a matter of trust.
If the government, which prints paper money is strong, the currency of
the country readily accepted all over the world and has a perceived
greater value, because credibility is high.
On the other hand, if the government, which prints the paper currency
is weak, then trust is broken and the currency's value declines rapidly.
Since gold has its own value, not the simple promise of payment, as in
the case of currencies, then the credibility of the gold never
fluctuates, and it always retains the value. Gold will never depreciate in the financial world.
Gold is extremely important for today's high-tech, even the currency
markets, because all the national currency, ultimately evaluated in
terms of gold.
Major national super-currencies like the dollar, euro and yen are
bought and sold continuously, and move up and down relative to each
other in global currency markets. Currencies also move up and down relative to gold.
Carefully monitoring the price of gold, foreign exchange traders can
get for themselves a valuable advantage, trying to discern trends and
trend reversals for a particular currency before the other players.
Gold, like the proverbial canary in the coal mine, provides an early
warning of potential problems with any of the national currencies traded
Kofnas: Do you think gold is undervalued? Hamilton: I do believe that gold is undervalued. The most obvious reason for the underestimation of gold is associated, in my opinion, the simple economic laws.
In our global economy, the price of any commodity, including gold and
currency, ultimately, determined the general global supply and demand. If the available supply of gold exceeds the current demand, the price of gold will fall, until a new market equilibrium. If the current demand for gold exceeds the available supply, the price of gold will rise until it reaches an equilibrium point. In free markets, prices are determined only the interaction between supply and demand.
Today, the global gold market, estimated demand for gold in the world more than 4,000 tons annually. However, for many years, the amount of gold mined worldwide every year and sank much lower global demand. Today, each year produces a total of approximately 2,500 tons of gold.
With 4,000 tons of gold annually eagerly-selling by investors and
industry worldwide, and only 2,500 tons of gold mined in the year, there
are very large - 1,500-ton structural deficit that can be solved only
through much higher prices for gold.
The increased price of gold will reduce demand and stimulate a greater
supply in the global marketplace, ultimately, eliminating the deficit. While the natural demand for gold is not equal to the natural suggestion, gold remains undervalued in purely economic terms.
The primary reason why the price of gold has not catapulted in recent
years is that foreign central banks, primarily European, strongly sold
their large gold reserves, accumulated over the centuries.
Central banks, which are believed to have a total of approximately
33,000 tons of gold were sold each year, enough to fill 1,500-ton
structural deficit of gold per year. Gold sales by central banks is cyclic, which occurred in the past.
As soon as the current sales cycle is reduced to nothing, the only way
that gold could reach the natural market equilibrium - is much higher
Because it is very time consuming and capital-intensive process to
develop new gold mines, it will take years much higher gold prices
before the offer will be equal to the natural global demand for gold.
While there is a huge structural deficit between supply and demand for
gold, iron economic laws unambiguously predict higher gold prices in the
future, so that, ultimately, to reach a new market equilibrium at a
By the way, the foreign exchange market, the rate of national currencies as determined by global supply and demand.
For example, if the international demand for U.S. dollars increases,
the Federal Reserve could just print unlimited dollars to meet this
And the Federal Reserve, is well behaved at the end of the last decade,
both showed very high growth in money supply in the United States.
Increasing the demand for gold and, consequently, rising gold prices,
we can only satisfy the physical delivery of gold, by increasing or
decreasing its production of gold reserves, and can not be made out of
nothing, like paper currencies.
Kofnas: If gold is undervalued, then this implies that the currency overvalued, is not it? Hamilton: Yes, it is.
The value of currencies is determined by a complex interplay of many
factors that influence the changing global trends in supply and demand
for each currency.
Some of the key factors that influence the currency's value - is the
rate of inflation, interest rates, the price of gold in a country that
produces a given currency, the relative attractiveness of its comparison
with other currencies and the fluctuating supply and demand, formed in
currency trading on global markets.
On paper currencies, the government simply run the printing press, when you need more currency.
The problem with this strategy, the inflation that the volume of paper
currency is always, ultimately, is growing faster than available goods
and services in the economy of the country. With increasing volume of paper currencies relative to the amount of goods and services, increasing inflation. Technically, inflation is not a consequence of increasing prices, which are only visible result, caused by inflation. Inflation - increase the amount of available currency.
Since most countries in the world today prints currency at a faster
pace than the rise of the economy, inflation is widespread now, and the
subsequent increase in prices to which it will become more and more
apparent in subsequent years.
For example, in 2001, the Federal Reserve increased the supply of money
in the U.S. by 20% year on year, while at the same time the U.S.
economy grew only by less than 1%. As we have seen, in the coming years the U.S. dollar is very depreciated against gold and other currencies.
Since all the world's leading countries that have hard currencies in
the forex market, greatly increased the supply of money in response to
the global economic slowdown, the currency is becoming more and more
overvalued. Increasing the price of gold is always followed by inflation of paper currencies like clockwork.
Kofnas: Today, we have different currency pairs, which can sell the individual trader. Do you think possible range of currency pairs, including gold, like gold / USD or gold / JPY? Hamilton: One of the many fascinating features of the global gold market is that it has traded almost exclusively in U.S. dollars.
Do you also collect gold from the depths of mines in South Africa or
open in the jungles of Papua New Guinea, if gold goes to international
markets, it is sold for U.S. dollars. For this reason, I suppose, to currency traders it is essential to monitor the price of gold. A pair of gold / dollar is one of the most important fundamentals of global currency markets.
For other currencies, the spot price of gold is more a function of the
interaction between the local currency with the U.S. dollar and the
price of gold for the U.S. dollar than anything else. For example, if the price of gold for the Japanese yen rises, it's not because of Japan's demand for gold is very high.
This means that the Japanese yen fell against the U.S. dollar, and
because the international gold market is traded in dollars, the price of
gold in yen, in the long run, increases because it takes more yen to
buy dollars, which are then used for purchases of gold.
This concept at first may seem strange and illogical, but if you know
the price of gold in U.S. dollars and the exchange rate between the
dollar and other currency, you can easily calculate quite accurately the
gold price in local currency.
Sometimes, there are abnormal phenomena, such as the upsurge in demand
for gold, which lead to a deviation of this relationship, but this is
rare. Mainly, the total international supply and demand determine the price of gold on gold in U.S. dollars. The relative strength or weakness of U.S. dollar exchange rate is determined between the dollar and other national currencies.
Then, finally, the gold price in local currency shall be determined by
how much gold can buy the local citizens for dollars on the world
market, unless they first convert their currencies into dollars and then
Thus, in the end, a pair of gold / dollar really is the primary
exchange rate of gold, followed by foreign exchange traders have to
Changes in the exchange rate of gold / dollar quickly roll in all
markets, affecting the local price of gold in any other currency in the
Kofnas: Consider the following trading strategy. First sold gold and then sell the gold against the currencies, offering new scenarios of trade. For example, the yen to depreciate faster than could be against gold than against the U.S. dollar. This is a real scenario? Hamilton: Yes, gold can definitely bargain for other currencies.
If the yen depreciates against the dollar, the price of gold for the
yen rises much faster than the dollar price of gold, because,
eventually, somewhere in the supply chain is closed, Japanese investors
will convert their yen into dollars and buying gold. This scenario is exactly recoup some years ago in Japan. Trading Strategies for Gold and Currency varies depending on which currency denominated your assets.
If they are denominated in U.S. dollars, gold provides a hedge against a
falling dollar and speculative bet on the dollar's decline.
If your assets are denominated in other currencies, gold, firstly
insures you against any decrease in your own currency against the dollar
and, secondly, to protect you from lower U.S. dollar, which is whatever
is the world's reserve currency, in terms of gold - the final
historical form of money.
Short-term currency traders can easily play on the rising or falling
dollar price of gold, which ultimately determines all the gold price in
local currency. However, unfortunately, history tells us that long-term traders are in fact only one bid with a high probability of success.
Because the government devalues its currency indefinitely after
inflation, the currency is constantly getting cheaper relative to gold.
In the long term, the price of gold will rise in all currencies, the
supply of which is growing at a faster pace than the global supply of
Kofnas: If gold is rising, what strategy for currency trading, do you recommend? Hamilton: Well, if the gold is rising, the U.S. dollar will fall. The best strategy for currency traders in this scenario is to go long on gold and short the dollar. According to other currencies may also trade the short side, but the primary effect would be in the dollar gold price. Global perception of the price of gold depends on the price of gold for the world's reserve currency. Any significant rally in gold will eventually be accompanied by a weakening dollar, as we have seen in recent years. Sell U.S. dollars, if you believe that gold is going to rise.