The price of gold has been on the rise and as it continues to climb a lot of investors have begun to wonder about the impact of the gold price on global currencies. As the price of gold continues to climb, many investors have begun to wonder how the yellow metal’s price movement’s impact is on currencies across the globe especially what how the gold price Australia is affected. There is a lot of talk that has happened around the movement of the gold price the idea of how the gold price affects or is affected by other currencies isn’t discussed as much.
The impact of gold on currencies and vice versa can best be understood by going back a few decades when gold was the backbone of the world’s monetary system. We have to go back to the gold standard when the value of currencies was directly linked to gold. Back then paper currency had value because it was tied to a real asset with a real measurable value. This gold standard was introduced as far back as 1871 in Germany and many countries adopted the system. It became clear that the system couldn’t be sustained during World War I and countries realised that they could no longer sustain such a monetary system. People began to have less confidence and trust in the gold standard because of changing politics, rising debt, and other factors.
The gold standard came to an end when Western countries came to an agreement and developed the Bretton Woods agreement which laid the framework for the currency markets. With most currencies being pegged to the gold price and the dollar became the de-facto reserve currency. This meant the national currencies were linked to the US dollar. The Bretton Woods led to the overvaluation of the dollar which led to exchange rates being tied to the gold price. However, the Bretton Woods System ended in 1971 which meant the dollar/gold convertibility ended. From the 1970s most countries run on a system with money being issued by the government not backed by a commodity.
The effect of gold on the U.S dollar and currencies
There are lots of factors that affect the gold price. These include the movement of the US dollar, the interest rates, the geopolitical turmoil, the slowing down of the economic growth, supply and demand affect what happens to the yellow precious metal.
The US dollar might be one of the biggest catalyst for the rise and fall of the gold price, the precious metal also has an effect on the greenback. The US Dollar has taken some knocks recently struggling to maintain its value, this has shifted the spotlight to gold which has been rising on the back of a falling dollar. Gold has not lost its purchasing power. It can be bought and liquidated into different currencies. If the dollar is performing poorly as a currency, other currencies might also be doing better. Right now, the gold price Australia might be on the rise mainly because the dollar is struggling. On the other side, when the US dollar is doing well, gold declines and it becomes too expensive to hold for non-US-based investors.
Before understanding how gold affects other countries’ currencies, we would need to look at the foreign exchange market also referred to as Forex or FX. This market is the single most decisive factor for global currency exchange rates. FX Traders can buy and sell or exchange currencies. This market is made up of banks, dealers, central banks, commercial companies, investment firms, and more, it also provides the platform for currency conversion to happen for international trade and investments.
Because the value of most countries’s currencies is tied to the value of their gold exports and imports, nations can’t avoid being affected by the movement of the gold price. This is one reason why a country like Australia that exports a lot of its gold will experience a rise in the value of its currency. This is why most Australians will say they have experienced an increase in the value of their gold investments.