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Chapter 28, Part I. Intermarket Analysis - Commodities. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Pipruit: Is it like EUR/USD and Dollar index in previous charter?​


    Commander in Pips: Right, since they move in opposite direction but their charts are almost a mirror of each other – they have solid negative correlation. Maximum correlation is 100% or -100%. It could be achieved, say, if you will find correlation of EUR/USD with itself. This will be 100%, since those charts are equal. Usually two different assets do not have 100% or -100% correlations, but when correlation reaches +/- 70-95% it treated as significant. The major idea of correlation is “How changes in one of the assets explain changes in the other one.” This thought is implied mathematically. But for us the major thought to understand the moment that the larger correlation is – the more “similar” assets move. If it is positive – they move in the same direction, if negative – in the opposite direction.

    Now let’s return to the link between Gold and the USD – they have a solid negative correlation. There are two explanations that exist for that. The first one is fundamental. When the global economy falls into turmoil and different crisis, or some geopolitical catastrophe happens – investors try to save their money and want to invest them in some real asset. No doubt that gold is such asset. During such moments investors are doubting any paper money, even the US Dollar and invest in really safe assets – precious metals, and mostly in Gold. When the economy starts to repair and grow, investors become more confident with the future and safety of their assets even outside of gold and they start to invest them in other assets, buying currency first. So, gold is starting to decline and the US Dollar – to grow.

    The second explanation is quite simple. The point is that we can treat gold as a currency pair, since it trades on Chicago Mercantile Exchange in USD – we might say that this is Gold/USD. It’s obvious that when USD moves down, gold price in USD moves up and vice versa.
     
    #1 Sive Morten, Dec 26, 2013
    Lasted edited by : Oct 8, 2016
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