There is a close relationship with the gold market and the forex market. Gold is technically no longer a currency, nor does it back currencies, but it is still an alternative to them. Therefore, gold and the currency market are closely related and if you get involved in forex investing, you will need to understand the relationship.
Gold is known primarily as a hedge against inflation. What does that mean? Well, all currencies are vulnerable to inflation. When inflation happens, the value of the currency goes down in terms of purchasing power. And inflation is inevitable.
For example, $1 used to buy a lot of food in 1900, but that same amount will barely buy a candy bar today. That is the effect of inflation and no one can fight it.
So what happens is when people save their money in a savings account or checking account, they lose the purchasing power of their currency every year. If they have $1,000 saved up, it will buy less in 10 years than it will today. Inflation typically cuts away around 3% of purchasing power per year.
Gold on the other hand has historically beat inflation over time. It grows in value in excess of 3% a year, making it a good hedge against inflation.
The other relationship it has with the forex market is the fact that is used to back all of the major currencies of the world. That is no longer the case, but it is still seen as having a relationship with the market, especially with the USD.
In fact, people think that the USD and gold have an inverse relationship. That means when the value of the USD goes up, gold tends to drop and vise versa. Many forex trading strategies in USD uses gold as a leading indicator.
The main reason might be, especially in an economic downturn, is that people flee to gold as a safe haven. In addition, USD itself is a safe haven investment, but when the economy is in a state where even the US dollar is no longer seen as bullet proof, gold comes to the rescue.
You Might Also Enjoy:
- Maximize Your Earnings With Foreign Currency
- Getting Started In Forex Trading
- What are Free Forex Signals and Do They Work?
- Forex Currency Trading | MACD
- Financial Intermediary Services
