Forex Trading system and precious metals

Universal fascination with gold is an obvious understatement. All Forex and futures
traders are very intrigued about the correlation between precious metal prices and currency prices.

The ISO (International Standards Organization) designation for gold is XAU, where
“X” is the identifier for financial vehicles other than currencies and “AU” is short for aurum, Latin for gold. Spot gold prices are represented in the same manner as Forex currency pairs: base currency on the left and quote currency on the right. XAU is always the base currency in the pair when quoting gold prices. Examples are XAUUSD,XAUEUR, XAUGBP, and XAUCHF.

The streaming spot prices represent what gold customers are willing to pay at the
current moment in time for gold coins, bullion, ingots, bars, wafers, and so on.
Historical data on compact disks for spot gold prices is available through Disk
Trading, Ltd., and the quotes are supplied in the identical format as currency pairs.
Thus upticks and downticks are supplied with time intervals of one minute and
higher.

Major U.S. and British Spot Gold Dealers

Gold Information Network
www.goldinfo.net
Kitco
www.kitco.com
American Precious Metals Exchange
www.ampex.com
Gold Masters
www.goldmasters.com
Gold Prices
www.goldprices.com
London Metal Exchange
www.metalprices.com
Bullion Direct
www.bulliondirect.com

SILVER STATISTICS

Analogous to the gold study above, we will again use the coefficient of variation as an indicator to determine how closely major currencies follow the prevailing price of silver.
It is interesting to note that after the coefficients of variation for both gold and silver were sorted with the highest correlation at the top, the major currencies are in the same order. However, none of the coefficients exhibited enough deviation or uniqueness to devise any hard and fast rules that traders can employ presently. We intend to probe this side venue of currency trading in more detail.

CAVEAT

Both trading in spot precious metals and currency trading have their intrinsic risk/reward factors. Readers should be aware of one interesting historical note on the volatility of silver prices.

In 1973 the Hunt family of Texas began taking delivery on silver futures contracts as
a hedge against inflation when silver was in the $1.95 per ounce range. By 1979, the Hunt brothers (Nelson Bunker and William Herbert), with the assistance of some wealthy Arabs, amassed over 200 million ounces of silver, accounting for nearly half of the world’s deliverable supply.

In early 1980, silver peaked at $54 per ounce, then plummeted on March 17 from
$21.62 to $10.80 in a single day. A combination of changed trading rules on the New
York Metals Market (COMEX) and the intervention of the Federal Reserve brought the
entire fiasco to a close and in 1988 the Hunt brothers were convicted of conspiring to
manipulate the market when their liabilities had grown to $2.5 billion against assets of $1.5 billion.

Amazingly, there is an upside to this rather scary tale. Numerous economists pro-
claim that market prices are merely the result of random walk theory and that technical analysis is simply human folly.

Given the history of silver prices from 1789 to 1973 as a mathematical
database, the likelihood of hitting a price of $54 in the subsequent seven years is not impossible using random walk theory, merely astronomically small. The moral is simple: Never initiate a currency trade without a stop loss limit order. Also, it is not wise to trade securities under SEC investigation regardless of how lucrative they may appear to be.