Gold’s relationship with the FOREX Market
In countries around the world, gold prices are dollar-denominated. This means that the fluctuations of the dollar greatly impact the prices of gold. When investors lose confidence in the U.S. dollar, gold prices shoot up. According to data over the last couple of years, the inverse correlation between the precious yellow metal and the greenback are about 80% – 90% negative.
Gold price fluctuations speak in volumes, which is why it’s always a good idea to monitor its prices. A spike in gold prices can mean any of these three reasons.
When gold prices suddenly shoot up and the USD goes down, this might be an indication that there’s a political strife somewhere. Investors turn to gold when there’s geopolitical tension for fear of an invasion. When there’s tension, there’s risk of losing the value of fiat currency. When fiat currency fails in its purpose being a medium of exchange, gold can be used to trade for products and services.
Importation > exportation
A country that exports a lot of gold is an indication that it has a strong currency. A nation’s economy relies heavily in its trade, so when a country imports more than it exports, it means that it doesn’t have the capacity to sustain its economy without foreign help. A spike in gold prices can either compensate a surplus or deficit in currencies.
A good example of a country with high trade deficits due to imports is India. BullionVault mentions that India’s recently-concluded 80:20 law on gold imports compels sellers to re-export 20% of their wares before the rest can be consumed for domestic use. The fact that India’s government needed to implement strict measures to its gold trade shows just how serious imports are to the strength of a currency.
Fiat currency used to purchase gold decreases the former’s value
When a country decides to print more money in order to purchase gold, it is creating a surplus. A surplus in paper money is very risky since buying gold with it will devalue the currency. The bigger the surplus, the more devalued the money.
Gold will always be a part of foreign exchange markets. Because of this, Investors who want to be experts of the FOREX market should keep themselves updated with gold’s price movements.