# Correlation between gold and aud (exposed)

I received an email over the weekend asking about the correlation between gold and AUD and, to be honest, I did not know if there was any relationship between the two other than the long arc stories generated by the economists. So I decided to take a look. When you begin to see the relationship between the instruments, you must first define what you are seeing. The email I received implied that they seemed the same today, so this implied some kind of relationship.

At a glance, at present, both instruments seemed to be forming some kind of wide congestion, but this raises the question of whether this is a relevant observation, since it would be possible to find hundreds of instruments that currently show the same pattern. However, a simple analogy will suffice to put this in context. If you have two cars that drive next to each other on a road, this does not imply that they have come from the same place or, more importantly, that they are heading towards the same destination. The correlation between the instruments is more nuanced than simply observing that they look the same.

The correlation can be divided into two parts, correlation of prices and correlation of returns. The price correlation analyzes whether prices move along with any degree of regularity and operators often stop analyzing here because they assume that if they move together, then the impact of an account or trading system will be the same. The problem with this is that it is not representative of the whole image. There is a second arm for correlations and this is the idea that returns between instruments can be correlated. It is important to bear in mind that it is possible that the instruments have very high price correlations; in simple terms, they look similar but have very different performance correlations. Returns are what matter to an account, not if something looks the same as something else.

In breaking down the correlations, I would like to ask a simple question: what the value of \$ 1 looks like if it is invested in each instrument, since this takes into account its different historical returns and unpacks any link between these returns.

As you can see in the graph, the \$ 1 path invested in any of the instruments sometimes shows a completely divergent path that was exacerbated during the 2008 Bull Run gold and this raises the issue for operators about what possible returns like to expose your portfolio. to. The problem here is not so much whether the instruments have the same look and feel, but the potential impact that exchanges will have on your account. It is also quite easy to understand the different nature of these returns by reference to the environment in which the instruments exist.

Metals like gold are free from government interference: they can find their own level. The currencies are not free of such intervention, the fate of the AUD is intimately linked to the Government's policy and this, ultimately, establishes limits around where the currency can go. For example, it is impossible for a pair of currencies to start operating at \$ 0.75 and for \$ 7.50 three months later, this type of movement is the preserve of the shares.

So, apart from looking the same now, my answer to the question is whether these two instruments share any meaningful connection to the operators, I would have to say no. There will also be someone who talks about the narrative behind the relationship between commodities and a certain currency, but my answer is that this is irrelevant. The merchants are not interested in the stories or if things look the same, they are or should be interested in the returns.

You can see the tables attached to the articles here: https://www.tradinggame.com.au/correlation-…ld-and-the-aud/

Author: Chris Tate

Article reproduced with kind permission of TradingGame.com.au

This piece ends with the 3 quotes below:

"The main message that I want the operators to understand is how important is the disciplined execution of an operations plan well thought of in today's markets." – Andy Jordan

"When you have an excess of confidence, you are prepared for a big setback in the market." – Joe Ross

"Every system starts in reduction". – Chris Tate

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