XAU/USD in the Foreign Exchange (FOREX) Market (Part I)

Precious metals such as gold, silver, and platinum are now considered chiefly as investment and industrial commodities. Gold has been considered the safest among these precious metals and has become the most well-known investment globally. Even since ancient times, gold has been considered a symbol of wealth and has proven its importance in investments.

XAU/USD in the Foreign Exchange (FOREX) Market (Part I)

In the Foreign Exchange (FOREX) market, gold symbol is known as the XAU/USD, a currency pair that informs the trader how many US dollars ($) are needed to purchase one ounce of gold. According to the ISO 4217 standard code, XAU is a currency for one ounce of gold. One ounce of gold equals a pip value of $0.01 or 1 micro lot (1000 units). Other Researchers conducted research that studies the correlation between gold and USD exchange rates. So, the conclusion was that there was an inverse relationship between the gold and USD exchange rate returns. This means that when the gold prices increase, the USD value will decrease and vice versa.

Gold during the Financial Crisis

Economists evaluated the 2008 financial crisis as one of the most significant economic collapses since the Great Depression occurred in the 1930s. Also, some Researchers mentioned that the financial crisis was due to the government’s act of eliminating restrictions in the financial industry, which triggered a housing price bubble in the United States and many other places.

As a result of the crises, many property owners in America were in debt due to their mortgages being higher than the worth of their homes. Thus, they could not sell their houses without paying back the mortgages to their lender. Nevertheless, the 2008 financial crisis and other economic recessions like the COVID-19 outbreak have increased the value of gold and become a vital asset that many investors have taken as their investments to obtain profit. So, it can be noted that a rise in the price of gold also signals that the economy is doing poorly and that investors would purchase gold as protection.

Meanwhile, a fall in the price of gold signals that the economy is healthy, and during this time, many investors will purchase less gold. In addition, this condition would also mean an inverse relationship exists between gold prices and the stock market. The stock market would fall during an unhealthy economic such as a financial crisis. Thus, the cost of gold would fall when the stock market performs well, and vice versa. The price of gold would be rising while the stock market is collapsing.

Because the probability of gold having no value is almost impossible, gold is considered one of the safest options for investment. Since many individuals are using gold for investment purposes, its liquidity in the market tends to be very high. However, XAU/USD may fluctuate and is most volatile at a specific time in the Foreign Exchange (FOREX) market; therefore, conducting short-term trading can also be a good idea for individuals seeking to take advantage of the fluctuations and make a profit.

Also, the activity of purchasing gold among individuals depends on one’s preferences. Some individuals would prefer to buy physical gold, for example, jewelry and other high-quality gold-based products. In contrast, others purchase gold as a currency pair (XAU/USD) in the Foreign Exchange (FOREX) market.

Methods for Analyzing the Market FOR XAU/USD in the Foreign Exchange (FOREX) Market

Fundamental Analysis

The fundamental analysis measures the intrinsic value, or the “fair value,” by observing the economic and financial factors from a macro to micro perspective. Investors usually receive information from public corporations about the overall economic health and their abilities that will influence and impact prices. Some essential indicators that traders can monitor:

Gross Domestic Product (GDP): this indicator is considered the most critical factor in determining the economic strength of a country. It consists of the total production value during the period and the purchases of goods and services by an individual, business, country, or government.

Producer Price Index (PPI): this translates to the measure of the average level of prices of a fixed basket of goods received in primary markets by producers.

Consumer Price Index (CPI): this measures the average price level of a fixed market basket of goods and services purchased by consumers.

Technical Analysis OF XAU/USD in the Foreign Exchange (FOREX) Market

Previous studies on technical analysis were conducted by researchers Allen and Taylor in 1990-1992 and were considered the first systematic study ever to occur. They reported that technical analysis is an essential tool in 90% of the decision-making for FOREX traders. Menkhoff and Taylor later, in 2007, conducted similar research about the importance of using technical analysis in the foreign exchange (FOREX) market and reported that applying technical analysis in FOREX trading would be profitable. Another study conducted by Roudgar analyzed the success of technical analysis in the FOREX market using three different timeframes. The result proved that technical analysis is essential in predicting the market's future.

In motivation to find out whether joint technical analysis such as the Relative Strength Index (RSI), Bollinger Bands (BB), and Moving Average Convergence Divergence (MACD) would bring profitability for individual currency traders, Abbey and Doukas conducted further research on whether individual traders are using these technical analyses and to prove whether there is a correlation between the technical analysis and the performance of the individual trader. Also, the result shows that traders apply well-known technical indicators in their currency trading activity. However, there is an inverse relationship between performance and the utilization of technical indicators.

Conclusion

The technical analysis method is a popular trading approach based on identifying the trends and patterns in the price movement based on an analysis of past price behavior. So, traders will then look for the perfect time and point for entering the market and earning profit from the trade. Therefor, Technical research in the foreign exchange (FOREX) market is conducted using qualitative methods, such as identifying specific patterns in the data from visual observation of a time-series plot, quantitative methodology, such as using the moving average, or a combination of both.