Gold’s importance in the financial markets is one of mystique. While gold has historically been a currency dating back all the way to prehistoric times, it still has quite the following today, even though it is mostly unused as a currency.
Compared to other precious metals like silver, which is used in industry, most of the gold used around the world is used in making jewelry, or for investment purposes. Humans can’t explain it, but we just love gold. We do.
Investors see gold as a currency that has no national boundaries or influence. Gold can’t be printed up, nor can it be destroyed. It doesn’t rust, and it’s been a currency for much of human history. So
Gold vs. the Dollar
Gold is the anti-dollar. When investors buy gold, they’re really just trying to get away from currencies, specifically the US dollar. Remember, the US dollar makes up the majority of foreign exchange transactions; so, when investors buy gold they’re avoiding the dollar in exchange for the yellow commodity.
It is safe to say that when gold stages a rally, the dollar is losing value against most, if not all, world currencies.
But where gold and the dollar have a very simple relationship, forex traders can use two currencies, the Swiss Franc and US dollar, to maximize their profits on the change in gold’s price.
USD/CHF Correlates with Gold
The USD/CHF pair has a negative correlation with gold. Rising gold prices mean a falling USD/CHF price. Falling gold prices result in a rising USD/CHF price.
The Swiss Franc is positively correlated with gold because it has historically been backed by gold. The Swiss Franc is also associated to some of the traits of gold including anonymity in banking, and neutrality to world affairs. Gold is anonymous—you can hand it to someone without anyone else knowing—and it’s neutral in that no one entity can have 100% control over it.
The correlation is strengthened with the Swiss central bank’s holdings of gold. As of 2010, the central bank held X amount of gold in reserve, equal to x% of the currency supply.
