One of the most widely discussed metals is Gold and many people look at the news due to its outstanding role in both the investment and consumer world.  Its value as a commodity has been increasing since the past decade.  Even during the times of kings and kingdoms, the prosperity of that kingdom was directly proportional to how much gold the king owned. However, through the years, even after currencies were created that are in use today, gold serves many purposes in the economy which includes how it affects the value of these different currencies. Even though gold is no longer used as a primary form of currency in today’s world, it continues to have a strong impact on the value of those currencies. Moreover, there is a strong correlation between its value and the strength of currencies trading on foreign exchanges.

To know in depth the relationship between gold and foreign exchange trading, lets look on the following points.

How Gold can be a Currency

Gold is considered as a currency under free market system and it has a price that compares to other exchanges such as the US dollar, euro and Japanese yen. Gold works in many ways just like other currencies. Gold can be bought and stored, but it is not usually used as a direct payment method. However, it is very liquid and can be converted into cash in any currency relatively easily. There are times when gold moves higher and even there are times when other currencies or property classes generally perform better. Gold can be expected to perform better when confidence in paper currencies declines, during wars and when stocks face significant losses.

Long time ago, Gold was used as Backup currencies

Until the gold standard was dropped, countries were not be able to print their Fiat currencies. Despite after that, Paper money had to be backed up with an equal amount of gold in their reserves (then, as now, nations had gold and gold in hand). Although the quality of gold in developed countries has been declining for a long time, some economists believe that we should return to it due to the volatility of the US dollar and other currencies; they want countries to control the amount of money they are allowed to print.

Countries that Import and Export gold

This means that when the price of gold climbs, it creates a trade surplus or inevitably helps those nations offset a trade deficit. However, countries that import large amounts of the yellow metal will generally have a weaker currency when the price of gold goes up. 

Countries that specialize in producing gold products, but lack their own reserves, will be large importers of gold. In return, these regions end up being particularly susceptible to growing gold prices.  Additionally, when central banks buy gold, it affects the supply and demand of the domestic currency, which could escalate to the creation of inflation. This is mostly because of the fact that banks rely on printing more money to purchase gold, and thereby create an excess supply of the fiat currency.

Conclusion

There once was a time that gold was the principal currency between foreign nations. Even though it is no longer used as currency, it can still have a strong effect on a country’s currency and in turn the country’s economy. One thing that we can say for certain with regards to gold’s future, with the world’s population ever increasing, is that the demand for gold is going up also, whilst supply is going down. As such, it is a pretty safe bet that for the long term, the price of gold will remain stable and most likely increase.