The link between dollar, INR, gold and the way forward for a currency and commodity trader

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At last! We’ve finally reached the end of the road for this module. We’ve already touched upon a wide variety of topics relating to both currencies and commodities. So, it's only natural that we conclude this module with a chapter that explains the link between currencies and commodities. That said, let’s jump right in.    

The relation between gold, USD, and the INR 

If the previous chapters have taught us anything, it is that both gold and the USD are considered to be safe-haven assets. But both gold and the USD themselves share an inverse relationship with one another. 

Generally, when the value of the USD decreases, the demand for gold rises, thereby causing an appreciation in the price of the yellow metal. This is due to the fact that when the USD itself depreciates, investors look towards other safe-haven assets to invest their money in. And gold features pretty high on the list of safe investments.

Let’s look at the charts of both gold and the USD to see if the above statement about their inverse relationship holds true. Here’s a line chart of gold for a period spanning from 2016 to 2020. 

Here’s a line chart of the USD for the same time period. 

If you take a look at all the marked data points on both the charts, the inverse relationship between gold and the USD becomes quite clear. For instance, if you see the first data point, at the start of the year 2016, gold had lost value whereas the USD rallied. On the second data point, which is during April 2016, gold went through a bullish phase while the USD took a beating.

While this inverse relationship is generally the norm, there have been instances where both the USD and gold either rallied or crashed together. Therefore, it is always a good idea to study both these markets simultaneously to establish a correlation if you plan to trade with both these assets. 

The relationship between gold and INR is also quite similar to that of gold and USD. Whenever there’s a depreciation in the rupee, the price of gold simultaneously goes up, and vice versa. 

Lastly, the relationship between USD and INR should be pretty clear by now. As we’ve already seen in the previous chapters, with respect to the USD-INR currency pair, when the USD appreciates in value, the rupee consequently takes a hit, and vice versa.    

Now that we’ve established the relationship between these three assets, let’s take a look at what a currency and commodity trader can do with this information. 

What can a currency and commodity trader do with this information? 

As a trader who deals in currencies and commodities, here’s how you can use the link between dollar, INR, and gold  to your advantage. 

Investing in gold when the currencies are down 

Going by the inverse relationship between gold and the currencies, this strategy is quite obvious. When the currency markets are going through a turbulent phase, you can direct your investments onto gold to ensure that you possibly continue making gains. This goes both ways too though. When gold is underperforming, you could invest in either the USD or the INR to try and generate short-term profits.  

Investing in gold to hedge currency risk

The relationship that gold enjoys with the USD and INR makes it the perfect asset for hedging the risk associated with the currency market. For instance, you can hedge your long position in USD by initiating another long position in gold. So, in the event of the USD not performing according to your expectations and depreciating in value, the long position in gold would perhaps offset any losses you may suffer from.  

Monitoring global economics and political scenarios 

As we’ve seen in the previous segment of this chapter, there’s a chance for both gold and USD to move in tandem with each other. Therefore, it is advisable to focus on the global economic forces, political scenarios, and the demand and supply of gold to predict its price movements rather than relying purely on the movement of the currency markets.     

The way forward for a currency and commodity trader

The commodities market in India is very vibrant and active, with more than 30 different commodities up for trade. Similar to the currency market and gold, the price movement of the other commodities also relies on global cues. This is especially true with regard to commodity categories such as precious metals, energy, and industrial metals. Just like how there is a certain set of factors and events that affects the prices of currencies, commodities also have their own set of influencing elements.

For instance, let’s take up a high-demand commodity like crude oil. While the price of crude oil is hugely dependent on the demand and supply, they’re not the only forces that control its movement. The actions of the Organization of Petroleum Exporting Countries (OPEC) and the U.S. government also play a huge role in dictating the price of the commodity. Additionally, both the global political scenario as well as the local political environment of oil-producing countries also influence the price movement of this commodity.

Wrapping up

The intent of this module was to bring you up to speed with respect to the commodities market and the trading process. Therefore, our focus was primarily directed towards the USD-INR currency pair and gold, which are among the most traded assets in India. All of the trading concepts that we used for currencies and gold apply to the other commodities as well. The only differentiating factor is the cues and elements influencing their price movements. That said, we will be touching upon these other commodities in future modules of Smart Money. 

A quick recap 

  • Generally, when the value of the USD decreases, the demand for gold rises, thereby causing an appreciation in the price of the yellow metal.
  • This is due to the fact that when the USD itself depreciates, investors look towards other safe-haven assets to invest their money in. And gold features pretty high on the list of safe investments.
  • The relationship between gold and INR is also quite similar to that of gold and USD. Whenever there’s a depreciation in the rupee, the price of gold simultaneously goes up, and vice versa. 
  • Lastly, the relationship between USD and INR should be pretty clear by now. As we’ve already seen in the previous chapters, with respect to the USD-INR currency pair, when the USD appreciates in value, the rupee consequently takes a hit, and vice versa.    
  • The relationship that gold enjoys with the USD and INR makes it the perfect asset for hedging the risk associated with the currency market .
  • There’s a chance for both gold and USD to move in tandem with each other. Therefore, it is advisable to focus on the global economic forces, political scenarios, and the demand and supply of gold to predict its price movements rather than relying purely on the movement of the currency markets.
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