Gold plays an important role in consumer and investment markets. No wonder it is the most discussed metal across the globe. Though the yellow metal ceased to exist as a primary form of currency a long time ago, it has a substantial effect on the monetary value of various currencies. There’s a strong relationship between the health of foreign exchanges trading currencies and the value of gold. In order to comprehend the relationship between foreign exchanges trading and gold, you need to know five significant aspects of gold.
In order to understand factors affecting today Gold Price, we must understand those five aspects. It will help us to understand the relationship between various currencies and the yellow metal.
1. Once Upon A Time, Gold Used To Support Fiat Currencies
In the era of Eastern Roman Empire, gold was used to support currencies which were considered legal tender. Through most of the 20th century, gold was used worldwide as the reserve currency. The US used gold standard till 1971. After that, President Nixon framed policies to discontinue it.
To begin with, gold was used as a currency because it restricted the amount of paper currency countries were permitted to print. It’s because back then countries had a restricted gold supply. Until the time gold standard was eradicated, nations couldn’t print their respective fiat currencies unless they owned an equal quantity of gold. While the gold standard isn’t used in the developed countries, there are a few economists who suggest bringing it back because of the fluctuations in the USD and various other currencies.
2. The Yellow Metal Is Used As A Safety Net Against Inflation
Typically, investors purchase the yellow metal in large quantities when their respective nations are undergoing a high inflation. For obvious reasons, gold’s demand hikes during inflation because of its value and restricted supply.
Since gold can’t be diluted, it’s able to restore its value better than other currency forms. Let’s take an example- In 2011, investors were scared by the diminishing value of fiat currency and the gold rate rose up to $1,500 per ounce. It suggests two things: first, the investors had no confidence in the currencies; second, the expectations of a stable economy were gloomy.
3. The Gold Rate Affects the Importing and Exporting Countries
The currency value of a country is linked to its imports and exports. In case a nation imports more gold than it exports, its currency value is bound to fall. On the contrary, if a country is an exporter, its currency value will go up. As a result, the currency of a gold exporting country, or a country having access to gold reserves, would strengthen when gold rate increases. Because of this, the value of total exports of the country will increase.
In simple terms, a rise in the gold prices can either create a trade excess or help balance a trade deficit in an efficient manner. Countries importing a large amount of the shinning metal will undoubtedly end up with a weaker currency when the gold rates increase.
For instance, countries that specialize in producing goods made with the shinning metal but have a lack of own gold reserves, will import gold at a large scale. Eventually, they’ll suffer when gold rates rise.
4. Buying Gold Reduces The Value Of The Currency Used To Buy It
When central banks buy gold, it impacts the demand and supply of the national currency and it might trigger inflation. Largely, this is because banks are dependent on the printing of money to purchase gold, and it will create a surplus of the fiat currency.
5. Gold Rates are used to evaluate local currency value, but exceptions are always there
Most people tend to use gold to evaluate their local currency. Though there is a relationship between fiat currency’s value and gold, it isn’t always an inverse relationship as most individuals assume.
For instance, if there’s a surge in demand for gold from a specific industry that needs the yellow metal for goods production, it will shift gold prices upwards. But it has nothing to say about the country’s currency, which might be of high value at the time.
While the gold rate can reflect the value the USD, situations must be thoroughly analyzed before establishing an inverse relationship.
Wrapping it up!
In India, gold Rate in Mumbai, the financial capital of India, follows the gold trend of the international market. Gold price, even after being affected by various ever-changing factors was stable in 2017.
The yellow metal has a huge effect on the value of various currencies. Gold is no longer used as currency, but, as a commodity, it can be substituted for fiat currencies. Also, it can be a great hedge against inflation. Undoubtedly, gold will keep on playing a significant function in the FE (foreign exchange) markets. Thus, it’s a significant metal and investors should analyze and follow gold industry trends as it has the ability to affect local and as well as international economies.
Image by Stevebidmead