Impact of gold on the foreign exchange market

Gold and other precious metals such as silver, platinum and palladium have intrinsic value as solid physical assets with important industrial applications. They also have value due to their ability to store significant amounts of wealth in a fairly small space.

As a result, many people hold gold to guard against inflationary pressures and to provide a medium of exchange during turbulent times that can devalue the value of fiat currencies. Moreover, many currencies at one time or another have been pegged to gold or the so-called "gold standard".

For example, from the mid-1940s to the early 1970s, gold determined the value of most of the major currencies in the world's foreign exchange markets in accordance with the Bretton Woods exchange rate system. This post-war system of fixed exchange rates collapsed in the early 1970s when then President Richard Nixon ordered the US dollar to be removed from the gold standard.

US dollar and gold

More recently, as the US government continues to significantly exceed its revenues under the pretext of stimulating the country's economy based on loan-freeing, investors increasingly look to gold as a hedge against the almost inevitable inflationary consequences of increased government borrowing to print more paper money. This has led to a recent inverse relationship between the value of the US dollar and gold.

Moreover, as Germany realized after World War I during a devastating hyperinflationary period in the early 1920s, this kind of irresponsible fiscal policy could lead to a fall in the currency and its possible replacement with a currency pegged to gold, the standard of real value in the forex market.

Euro and gold

Since 1980, when gold reached its previous record high of $ 850 an ounce, the price of gold has gradually declined until 1999, when it fell to a low of $ 257 an ounce. Interestingly, the fall in gold prices roughly coincided with the introduction of the euro in January 1999.

In addition, at least until the recent Greek debt crisis, the euro in the EU as a whole appreciated against the US dollar in part due to the relatively modest currency printing program controlled by the European Central Bank. This contrasts with the more active paper money printing program overseen by the Federal Reserve in the United States.

Australian dollar and gold

Another interesting connection between gold and currencies has to do with the value of the Australian dollar. Because as the value of gold rises, the Australian dollar tends to rise as well.

Basically, this link stems from the fact that Australia has significant gold reserves. In addition, Australia is a net exporter of gold, and the precious metal accounts for a large share of its national exports.

These factors make the value of the Australian dollar particularly susceptible to fluctuations in gold prices, although its value is also influenced by the prices of oil and other key commodities. As a result, the Australian dollar is often referred to as a commodity currency by forex traders.

Swiss franc and gold

In 2000, the Swiss franc became the last national fiat currency to be removed from the time-honored gold standard. Until this time, the Swiss franc had the status of a safe haven currency, which retained intrinsic value during difficult times, as it was freely convertible into gold.

The Swiss currency continues to benefit less from buying a safe haven due to its long history of political stability, neutrality and refraining from conflict. However, the currency's former close relationship with the value of gold has dropped significantly.

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Information taken from the forex-station forum