Tuesday, March 24, 2015
Gold and Currency Relationship
Gold is one of the most widely discussed metals due to its prominent role in both the investment and consumer world. Gold was also used as the world reserve currency up through most of the 20th century. Even though gold is no longer used as a primary form of currency in developed nations, 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.
Financial markets price movement prediction is basis of successful trading. And Experienced traders know, that trading the currency market requires not only knowledge of the forex area. Currency price movement depends not only on macroeconomic developments and other economic news, but also from other financial instruments movement.Trader, knowing that the currency with which the market is concerned, can predict some of the forex market movements before they happen.
It is undeniably true that the price of gold is related to the value of the currency, so it is essential to understand how this association has come about and exactly how the currency influences the commodities markets if you are considering making an investment in gold. Understanding how the relationship between the currency and the price of gold works can help you to make the most advantageous investment decisions.
The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold.Unlike other assets, gold maintains its intrinsic value or rather, its natural shine.Investors generally buy gold as a way of diversifying risk. The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. Gold price has shown a long term correlation with the price of crude oil. This suggests a reason why gold is sold off during economic weakness.
Gold prices are often used to measure the value of a local currency, but there are exceptions. Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
if there is high demand from an industry that requires gold for production, this will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time. Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.