How the Price of Gold Affects Forex Forecasts

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The gold standard may have been eliminated from the developing world, but the price of gold still has influence on the value of currency. To prove how important this small factor is, this article details the impact that gold price has on international currency markets.

Gold, Inflation, and Speculation

First, gold and other precious metals have intrinsic value as commodities and can be stored in relatively little space compared to fiat currency. This makes gold the perfect solution to hedge capital investments against inflation. In fact, gold is so much like its own currency; it is traded on forex markets against fiat currencies.

In this way, gold indicates the level of trader confidence in an economy. If confidence is low, traders typically buy gold against the USD instead of trading currency pairs. Increased demand due to low confidence in turn increases the price of gold.

The important part to note is, despite its intrinsic value as a commodity used in production, the price of gold is also directly related to speculation and perception. By its limited nature, and the fact that less than a century ago it was used to back up major currencies, gold endures as an “unbiased” currency based mostly on perception of worth.

Import and Export

Countries which produce and export gold are most benefited by high gold prices, as it not only increases import prices but also overall confidence in the strength of the country’s economy and currency. For example, Australia is the world’s third largest exporter of gold, and the value of their currency is often directly linked to the value of gold.

Conversely, countries which import gold for production see their currency weaken as the price of gold rises. Exploiting these facts will reward investors who follow gold trends and business news.

Some experts expect the correlation between the USD and gold producing countries as the memory of gold standard is forgotten. It’s foolish to think, however, that there is no indication at all for major countries, especially those with large reserves as well. Gold and the USD still have an 80% negative correlation.

Factors that Affect the Price of Gold

Just like the implications of price change in gold, the factors that enact these changes are varied beyond buyer confidence. Here are some examples of what drives the price of gold:

• Jewelry accounts for the majority of gold use. Jewelry trends highly indicate the demand and therefore price of gold, as do electronics manufacture trends.
• China and India are currently the world’s largest gold importers, using gold both for jewelry and electronics. These countries tend to dictate gold trade markets due to sheet volume of consumption.
• Gold is extremely limited, and major, “easy” deposits have all been mined, yet demand has been on the rise. Production is a major factor in the price of gold, and recent statistics imply an overall decrease in the world production of gold in recent years.

Gold value, like that of any other commodity or currency, is subject to a great many variables which must all be taken into consideration.

Make Smart Investments

Since the price of gold can have a large impact on world markets and currency values, you should keep up-to-date on current trends and projected forecasts. Smart investors know that knowledge is power, and every new indicator helps create a clearer investment future.