Economic uncertainty leads investors to safe haven assets to protect their portfolios. Gold, with its safe haven qualities, has enjoyed a rally of late, and forex traders have been trading gold as an alternative investment to potentially inflationary markets.
During times of economic uncertainty, gold prices have an inverse relationship with real yields and the US dollar. Forex traders often support the demand for gold as they seek an alternative forex investment that could provide a profit despite an inflationary environment. Similarly, when the US dollar is weak, it becomes cheaper for forex traders with holdings in other currencies. This pushes up the demand for gold and, by extension, forex prices increase as well.
Central banks turn to gold to diversify their portfolios and reduce exposure to forex assets that may be more vulnerable to market fluctuations. Forex traders should keep an eye on central banks' forex reserves and their demand for gold, which can massively inflate the demand for gold, thus having a knock-on effect on forex prices.
The recent gold rally can be explained by the aggressive interest rate-hiking cycles favoured by almost all major central banks that appear to be coming to an end, affecting forex markets. With the outlook for interest rates dropping, forex traders have been looking to gold as an alternative forex investment. Additionally, forex traders have turned to gold to defend against a possible stock market sell-off in the event of growth stagnating further.
Forex analysts predict that gold is set to reach all-time highs in 2023, with forex traders seeking a safe haven forex asset amid fears of a recession and stock market valuation risks. If central banks feel that they need to be more dovish on interest rates to protect growth, gold could rise by more than 20%, affecting forex markets. Meanwhile, inflation looks as if it will be stickier than expected around the world, so gold will continue to enjoy demand from forex traders who are looking to protect buying power as forex prices rise.