http://www.fxcmtr.com/images/banner-gold-green.gif
The Bull Market for Commodities is Back
As oil prices begin to find resistance near new record highs, the rally in gold price is picking up steam once again as it recently surpassed 25-year highs. Many analysts have been calling for a continued rally with some even setting targets as high as $850 an ounce.
Currencies in Lieu of Direct Commodities
Certain currencies are highly correlated with commodities, require less margin, and offer the benefit of earning interest. For gold, the closest correlation is with the Australian dollar / Japanese yen currency pair (AUD/JPY).
http://www.fxcmtr.com/images/chart-gold.gif
The chart above clearly demonstrates the close tie between gold prices and the AUD/JPY.
Why trading the AUD/JPY has a higher trading potential than gold bullion:
As oil prices begin to find resistance near its new record highs, the rally in gold prices is picking up steam once again as it heads back towards its quarter decade highs. Over the last two months, gold prices have had quite a run, rallying a whopping 20 percent, which is a strong move that is rarely seen in the yellow metal. Rising geopolitical risks and concerns for inflation pressures around the world has sent central banks, institutional investors and individual traders piling into the long gold trade. Many analysts have been calling for a continued rally in gold with some even setting targets as high as $850 an ounce.
Gold is Becoming the Oil Hedge
Gold has always been seen as the world’s ultimate form of safe haven investment and the only true form of wealth. With so much uncertainty in the world in terms of economic growth and geopolitics, it is no surprise that many investors, big and small have chosen to hedge their investments through gold. Gold is also seen as the best investment in times of geopolitical uncertainties and this seems to be exactly what traders and investors are doing at the moment.
Currencies in Lieu of Direct Commodities
If you think that gold is going to continue to move higher, the most logical trade is to buy the commodity outright, but margin requirements can be very high. Certain currencies are highly correlated with commodities while requiring less margin and offering the benefit of earning interest. For gold, the closest correlation is with the Australian dollar / Japanese Yen currency pair (AUD/JPY). The two products have a 72 percent positive correlation. The margin to hold AUD/JPY and to earn interest in a regular account is $2000, which compares to an overnight margin of $2,228 for gold futures. For the mini contracts, AUD/JPY requires a margin of $200 compared to $743 for mini sized gold.
Australia is the world’s second largest gold producer behind South Africa
Talk of more central banks shifting additional reserves to tangible assets like gold
A real push towards $850 would require significant weakness from the US dollar or a global slowdown
Japan suffers the most when there is a global slowdown or when the dollar depreciates significantly
Less margin than a Gold Futures contact on futures exchanges
$10.80 daily interest for a standard lot
Therefore if you think gold prices will continue to move higher, keep an eye on AUD/JPY.