How Are Currencies Influenced by Gold?

If you see gold and the currencies as they are, its a little farfetched to say that they affect each other. Currencies have their own market in the foreign exchange while gold remains a safe haven in its own market. Although they affect each other with currencies being exchanged into gold, there exists a relationship between them that are much closer and much severe than you think.

1) Hedging

The most obvious relationship between them is that one is used as a backup for when the other is in danger. This, of course, means that gold is used to hedge versus inflation. When a country is in turmoil and battling inflation, currencies tend to be too volatile with value plunging to uncontrollable levels. Gold,on the other hand, although also affected by inflation, tend to be more stable being able to retain its value better compared to the currencies.

2) Import and Export

Currencies are greatly affected by a country’s capacity for import and export. The direction a currency takes depends on which aspect is stronger in a country. Net exporter countries have better currency values while net importer countries are the opposite. But what does this have to do with gold, you say? Well, gold greatly lifts the value of a currency when exported as it also hikes the export’s total value.

3) Fiat Currencies

Gold used to be the major metal that backed up the fiat currencies or the legal tender of a nation. In essence gold was once used as a currency. It is used to determine the value of a nation’s wealth as the amount of money you can print then was only as much as the gold you own. It was termed as the gold standard. This is no longer in effect now but some economists feel that it should be revived due to the US dollar’s volatility.

4) Buying Gold

The supply and demand in domestic currency is greatly influenced by the purchase of gold by the central bank. Inflation is one of the possible causes because it requires the nation to print more money and thus more excess printed money.

The relationship between gold and the currencies has long been established and continues to deepen. They are both  essential in the existence of one another. This is why gold is an important commodity to look out for.