Gold has a very prominent role as far as the investment world is considered. As we know that gold is no more used as the base for the currency prices but then also it has a wide impact on the prices of currencies.
1. The economy which import or export the gold is affected by its prices.
As we know that the value of currency of any country is directly proportional to its export and is inversely proportional to its import. As gold is a very precious metal. So when a country exports the gold or has got high reserves of gold to exports strengthen its currency and when it imports the gold then the value of its currency declines.
2. The value of a local currency is measured by the prices gold with few exceptions.
This is very true that gold has a relation with prices of local currencies, but it does not have an inverse impact as assumed by many people.
3. Is gold a currency?
Gold is not used as a currency but then also it acts as a currency in a free market system. We can say so as gold is bought and stored by the countries and many a times it is used as a method of direct payment.
4. Gold and the USD (U.S. Dollar)
Gold has always remained a strong relationship with the U.S. Dollar. For a long time it was assumed that these both are inversely related to each other as the Prices of U.S.D. tends to decline with an increase in the gold prices and vice-versa. This was all because of Bretton Woods System according to which U.S. government had promised to redeem U.S. dollars at a fixed gold rate and the system was dissolved in 1971 and United States remains a global power in 2010. But this is not always true. Always remember that gold is a universal commodity hence, the gold always reflects the global sentiment, not the sentiment of one country or the group of countries.
5. The conclusion
It should be noted that the gold should be treated as a currency in a free market system just like U.S. Dollar, Yen, and Euro etc. Always remember that the gold is forward-looking. So, you should not wait till a disaster strikes an economy. As I said, gold trades against the U.S. dollar, not always but most of the times. So keep an eye on the prices of gold and U.S.Dollar while trading forex or investing in the foreign currencies.
See this video to see how gold affects the forex market
1 comment:
Gold has intrinsic value as hard physical assets with important industrial applications. Many people keep gold to protect against inflationary pressures and to provide a means of exchange in tumultuous times that may depreciate the value of paper fiat currencies.
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