Two outlooks that help identify the relationship between gold and money. Posted by James Randolph on September 27, 2011
Gold’s Correlation to Money: Two More Reflections
September 27, 2011 – It is a fact that even though gold does not hold the status of a predominant currency in countries that are developed, it still has an impressive repercussion on the value of such legal tender. There is also a fervent affiliation incorporating the might of currencies trading on foreign exchanges along with gold’s worth.
Two outlooks that help identify the relationship between gold and money are:
- The value of imports and exports is very much connected to the worth of a nation’s currency. The value of its currency will decrease when a nation imports more than it exports. Although when a country is a net exporter, the worth of its money will augment. Accordingly a nation that sends gold overseas or has the rights to gold reserves will observe a boost in the potency of its currency as gold prices increase, given that this increases the value of the country’s entire exports.
- To make this clearer, an increase in the price of gold can help counterbalance a trade deficit or create a trade surplus. On the other hand, countries that are great foreign buyers of gold will certainly end up enduring a debilitated currency when the price of gold rises.
- Nations that focus in manufacturing items composed of gold, despite not having personal gold reserves, will be great gold importers. As a result, those nations will be very much affected by hikes in gold prices.
- The manner in which most people value a nation’s currency is by utilizing gold as the ultimate alternative. It is widely known that a connection does exist amidst the value of a fiat currency and the price of gold, except that it does not work exactly opposite one another.
- An example of this is if there is an elevated demand from an industry that is dependent upon gold for production; this will induce gold prices to escalate. This could be going on at the same time that the local currency is also extremely valued. Consequently, while the price of gold can often be used as an indication of the U.S. dollar’s worth, conditions need to be scrutinized to establish if a contrary relationship is undeniably suitable.
The value of global currencies is greatly influenced by the yellow precious metal. Despite the abandonment of the gold standard, gold as an article of trade can perform as a replacement for fiat currencies and be utilized as an efficient hedge against inflation. It is highly likely that gold will persist in portraying an essential role in the foreign exchange markets. Hence, it is a key metal to trail and examine for its exclusive capability to symbolize the well being of both local and international financial systems.
Senior Staff Writer – Certified Gold Exchange