As the USD continues to rise in value, commodity prices like oil and gold will likely continue to drop. The USDX closed at 88.29 today, which is 23% above its April lows. The USD appears to be on the verge of another breakout to the upside. If bonds continue on the run they have started this week, that breakout on the USD might not be far behind.

Gold future's prices are correlated to the value of the USD. A large part of this correlation is due to the fact that gold and other commodity futures are priced in USD. If the USD is getting stronger or its purchasing power is increasing relative to itself and other currencies then it will take less of it to buy an ounce of gold.

On the other hand, if the USD is getting weaker it will take more of it to buy an ounce of gold and prices will rise. This correlation holds pretty true in the long term. However, the relationship between the two markets is not perfect.

Trading gold can be done in one of several ways, futures contracts are available, shorting the gold ETF (GLD) or buying a put on GLD are also options. However, from a currency trader's perspective, the AUD/USD may be a nice alternative. Weaker gold prices will contribute to a weaker AUD and with that currency pair teetering on support a breakout could result in a nice move to the downside.

 
Click here to see the video about trading gold prices and the AUD/USD currency pair.

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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."