How to Trade Gold vs Euro
Gold tends to be in the spotlight whenever there is economic turbulence. It is viewed by many as somewhat of a safe haven asset.
That said, what about the option to trade Gold vs Euro?
The critics of Gold, like Warren Buffett, may disagree with the above statements. However, many people do look at Gold as a viable tradeable asset.
Forex traders also like the Euro as it is a widely traded currency. The Euro is an interesting instrument to look at as plenty is happening in the European Union as of 2023.
Geopolitical conflict, commodity prices, high inflation, and high energy costs have caused plenty of volatility in the European economies.
In this article, we will explore what a Gold/Euro CFD (XAU/EUR) entails, what are the key drivers of Gold and the Euro, and what the current price action of Gold vs Euro looks like.
Table of Contents
How to Trade Gold vs Euro: An Introduction
As a trader, what if you could group together Gold and the Euro and trade them via a single asset? That is exactly what one can do with the Gold/Euro CFD.
While one may wonder whether it is a good idea to trade in a volatile currency like the Euro, one may also appreciate the fact that volatility can be considered an opportunity (with an equal amount of risk).
Whether the price direction is up or down, if one can trade the trend and have the right risk management setup in place, then big movements in price can actually be a good thing.
As with any Contract For Difference (CFD), the pairing can trade positions in both directions – Whether it falls in price (Sell) or rises in price (Buy). This allows for multiple trading strategy options.
Given that the Euro is one of the most popular alternatives to USD, it is a currency worth paying attention to regarding the reaction of the Gold price.
It is also important to note, both the Euro and Gold assets have negative correlations to the USD, simply for the fact that Euro is an alternative to the USD and, against the fiat monetary system.
Gold typically moves with the price of both Euro and USD and as mentioned, can be seen as a hedge against both currencies’ depreciation value.
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What is the Gold vs Euro CFD?
The Gold vs Euro CFD is a contract for difference involving two assets, Gold and the Euro.
The symbol “XAU/EUR” denotes that the base instrument is Gold while the quote currency is the Euro.
It basically tells us how many Euros are needed to buy 31.1 grams of Gold. If you are wondering why an odd number like 31.1, then you should know that 31.1 grams are exactly equal to one troy ounce, a standard weight for Gold in global markets.
So, if a trader is long XAU/EUR, then it means that the trader thinks that either Gold will go up, the Euro will weaken with respect to Gold, or both may happen simultaneously.
Similarly, if a trader is short XAU/EUR, then the trader must either believe that Gold prices will fall, or the Euro may strengthen with respect to Gold, or both may happen.
Advantages and Disadvantages of How to Trade Gold vs Euro
The advantage of trading the XAU/EUR CFD is that you can take a position in both Gold and the Euro simultaneously and you believe that there is some correlation between the two assets.
The other advantage of trading the XAU/EUR CFD (or any CFD) is that you can use leverage (which comes with a high level of risk).
For example, with a 5X leverage ratio, you can pay $1,000 to take a position worth $5,000. Leveraging your trade can be good and bad as the profits get amplified but so do the losses. The risk management strategy must always be considered in any scenario with trading.
When it comes to the disadvantages to how to trade Euro vs Gold, it should be considered that Gold is, in a sense, considered a global currency (even though it is technically a commodity) and can experience sudden price action for reasons which have little or nothing to do with the Euro.
Also, an additional disadvantage to consider, is that Gold is majority produced in the following countries: Russia, China, Canada, Australia and the United States. As none of the countries is within continental Europe, the production itself, a sizeable factor, can have nothing to do with the XAUEUR price fluctuations.
What are the Price Drivers for the Euro?
The Euro is the currency of the European Union. It is the official currency of multiple countries in Europe. Therefore, the economy of Europe plays a big role in determining the price of the Euro with respect to other currencies.
If the economy is doing well, then it is likely that investors from around the world will want to invest in Europe. Therefore, the demand for the Euro may go up and the Euro would strengthen as a result.
The interest rates set by the European Central Bank also tend to have a significant impact on the Euro.
The higher the interest rates, the greater the demand for the currency of a high-interest-rate country/region. That is because investors may get a higher return on relatively safe instruments like government bonds or high-quality fixed-income instruments.
Lastly, the geopolitical environment may also affect currencies just as much as economic policies do. The steps taken by the EU with regard to energy and the resulting impact on inflation have all impacted interest rates in the EU. Such events can have a profound impact on the Euro.
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What are the Price Drivers for Gold?
Gold is an interesting asset class. It tends to have a low or even negative correlation to the equity markets.
But sometimes, the correlation can be high. There is no clear-cut relationship between Gold and the stock markets.
The key aspect to note about Gold is that it is not an interest or dividend-generating asset. It serves as a store of value and can offer capital appreciation over time.
So, during times of rising interest rates, other interest-bearing instruments become more attractive than Gold. In this case, interest rates have an inverse relationship with the price of Gold.
Central banks can be big buyers of Gold.
They may buy Gold during times of uncertainty. They may sell Gold if they want to pump money into a growing economy that is in an upcycle.
The demand and supply dynamics also affect the price of Gold.
For example, if consumers want to buy jewellery and Gold products, then the demand goes up. If consumers buy Gold and store it away for decades, then that supply isn’t coming to the market.
Buyers from countries like India and China have a huge appetite for Gold. They can be important stakeholders as a result.
What is the Price Action of Gold vs Euro?
The below weekly chart from the TradingView widget for XAUEUR shows a period of uptrend followed by a sideways movement for almost a year.
The price formed a base for most of 2021 before breaking out in 2022. As for February 2023, the price is at an important level which has acted as both support and resistance at numerous times in the past.
*Past performance is not representative of future results.
Any major breakout or breakdown from here on could lead to a strong momentum-based move in either direction.
The longer-term trend appears to be positive. So, a moving average-based trading strategy can also be considered.
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How to Trade Gold vs Euro: Conclusion
In trading or investing, diversification is often key to maintaining a balanced portfolio which can target the individual’s given goals, whether that be short- or long-term.
Is the option to trade the Gold vs Euro CFD the right option for you? This can only be determined by each individual investor, given their risk profile and goals which are right for them.
In this article, we have overviewed the various price drivers for both assets, as well as other contributing factors and a current overview of the price action.
If you are planning to trade a CFD, then you should know that it is a leveraged product, and exercising proper risk management is highly recommended.
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What is the correlation between gold and euro?
The Euro holds a significant position as a primary alternative to the USD within the realm of fiat currencies. Consequently, a noteworthy association frequently exists between the euro and gold, as both these assets tend to exhibit a negative correlation with the USD.
Which currency affects gold most?
Gold has frequently been considered in connection with the USD, primarily due to its typical pricing in USD. Over the long term, there exists a negative correlation between the value of the dollar and gold prices.
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