Gold has a strong connection between its current price and currency values in the foreign exchange market. Even though the world’s currencies aren’t based on the gold standard anymore, the precious metal still continues to impact the value of currencies.
In March, gold saw an increase in price due to the political unrest in Ukraine. As long as there’s turmoil in the country, gold’s price will continue to rise in fear of a collapse in currency. But apart from political strife that affects the global market, what other relationship does gold have with the foreign exchange market?
To illustrate the correlation, here are a few facts:
Imports and exports affect a country’s currency
Currencies are tied solidly to a country’s imports and exports. When a country is dependent on imported goods, its currency’s value will weaken. A country needs to be a strong exporter of goods in order for it to have a strong currency. Countries that have the capacity to export gold like Germany have a solid currency because the precious commodity adds value to its total exports.
Italy, for example, used to be a strong exporter of gold until its decline in 1998. In the past, Italy’s then-currency, Lira was solid because it was backed up by a strong export of gold jewelry.
Gold during inflation
If a country is experiencing inflation, the natural reaction of investors is to buy gold. After all, gold can be traded in any country in case currencies completely lose their value.
Investopedia cites the April 2011 nightmare when investors feared the declining values of fiat currencies. During that time, the price of gold rose to $1,500 an ounce, meaning that there was very little confidence in the currencies being traded in the market, and predictions of the economy’s stability were bleak. The rule of thumb is when gold prices suddenly shoot up, it means currencies aren’t doing well. Readers may view Bullion Vault’s live tracking chart to see today’s gold price performance and compare it with the precious commodity’s behavior in March 2014. A quick glance at the chart will also show gold’s sudden price increase when the troubles began in Ukraine in March for the first time.
Ultimately, gold will always be tied up to currencies. Gold may decrease in price but it will always be the metal to look to in times of inflation, political unrest, and market uncertainty. In addition, its ability to make a currency strong is indisputable, making it a very important commodity to keep track of from time to time.