Commodities are raw primary goods which are used in our daily life. These basic products are divided into two categories, the hard and the soft commodities. The hard commodities are usually the ones that are collected through mining or are extracted from the earth, some examples would be Copper, Silver, Crude Oil.
On the other hand, soft commodities are essentially agricultural products or live stock (farm animals as an asset). For instance, coffee, sugar and wheat are some of the agricultural products which are traded as commodities.
The commodities market is a highly volatile market which has significantly impacted the world during the past. When a shortage of major commodity occurs then conflicts can be sparked as historically countries tend to venture into resource-rich regions to secure certain commodities. However, an oversupply of commodities can have a huge influence for an economy of a commodity-exporting country as oversupply decreases the price of the commodity and affects negatively the revenues of the country.
What is interesting about commodities market is not only its high volatility but also the influence commodities have on certain currencies. Influence which in the financial industry is called correlation. Correlations between commodities prices and currency markets can help traders understand how the markets work and develop trading strategies based on them.
Below we share some correlations for the commodities offered in Tickmill Europe Ltd (ex Vipro Markets Ltd): Gold, Silver and Crude Oil.
Gold has a negative correlation with USD. The main reason behind this is because in cases of economic unrest in the world, investors turn to Gold as a safe haven. Also, when the dollar loses value this in turn increases the value of other currencies which leads to higher demand of commodities including Gold. Therefore, what often happens is, when Gold goes up, dollar goes down, and when Gold goes down the dollar is bullish again.
For example AUD/USD or Aussie dollar for short has a positive correlation with Gold. The Aussie is connected with Gold as Australia is the 3rd biggest Gold producer in the world. So when you see Gold going bullish have a look on the Aussie, most probably it is bullish as well.
An interesting fact about Silver is that it tends to follow gold prices. In reality there is no significant economic or industrial correlation between these two precious metals but a closer look at the charts will show you that when gold falls and rises, silver tends to follow.
Aussie dollar has a positive correlation between the two metals as Australia is also one of the top silver producers in the world.
Canada is one of the largest crude oil suppliers for the US with an export over 2 million barrels per day. This high supply of crude oil from Canada to the USA creates a high demand for the Canadian dollar. Moreover, the crude oil exports are critical for the Canadian economy as it is their main income comprising approximately 85% of its overall exports.
Therefore, it is only logical that there is a positive correlation between the crude oil prices and the CAD. As when oil prices go up the CAD tends to go up as well in value. Remember that commodities and commodity-related currencies tend to be very volatile. Please bear this in mind and manage your risk accordingly.
The information provided here has been produced by a third party and does not reflect the opinion of Tickmill Europe Ltd (ex Vipro Markets Ltd). Tickmill Europe Ltd (ex Vipro Markets Ltd) has reproduced the information without alteration or verification and does not represent that this material is accurate, current, or complete and therefore should not be relied upon as such. The Information is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice. Reproduction or redistribution of this information is not permitted.