Commodities In Forex
It might come as a surprise to some people that there are some commodities traded in the forex market as well.
If one tries to look at commodities as currency, the concept becomes a lot easier to understand.
Ultimately, the importance of any and all currency is the value it holds against other currencies. If you have a large amount of USD, it is believed to be a good financial situation because 1 USD is worth a lotmore than 1 INR, or 1 TRY or 1 PKR. It is a strong currency.
Similarly Gold too is a material that is valuable because of its strength against other valuable assets such as USD or GBP. In the forex market, it is only exchanged for USD though.
These commodities are safe haven assets. A safe haven asset is one that will protect an investor in times of volatility. So when economies around the world are suffering and currencies are unstable, having a strong commodity will mean financial strength and stability for the investor.
Another reason to invest in commodities is low interest rate because they mean low return on an investment. In such times, investors tend to turn to commodities, especially Gold.
Let’s take a look at the three commodities that can be traded in the forex market.
Gold
This is the most valuable of all. It can be traded only with USD, and a lot of times the relationship between them is inversely proportional. So when USD falls, the value of Gold will rise. However, it is not recommended to make a rule out of it as there are times when due to inflation and financial stress the price of both will rise.
The symbol used for gold is XAU, and the pair appears as XAU/USD.
Silver
Silver fairs a little low in comparison with Gold and is also traded only against USD. It too is a safe haven asset and can protect investors in times of volatility.
Its symbol is XAG and the pair will appear as XAG/USD.
WTI
It stands for West Texas Intermediate and is a form of Crude Oil. It is a safe haven asset and can be bought using USD only. It is traded mainly in North America as that is also where it is produced and exporting it would mean additional costs. Also, outside of America there the popular type is Brent Oil and WTI can’t compete with it.
Where currency lots consist of units of currency, crude oil lot is measured in barrels. Unlike currencies, therefore the lot sizes aren’t made up of thousands of units. It is more like 10 barrels or so a lot.
Commodities, therefore, are also an interesting asset to look into if you’re interested in Forex. Especially for investors looking to diversify their portfolios or hedge, these safe haven assets can prove to be very valuable.
Now that most of the elements of the forex market have been discussed, it is time to look into some of the factors that influence the forex market most and which should be watched. That is what the next lesson covers.
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