Factors influencing gold exchange rate
With all eyes on the fluctuating economic crisis and the growing distrust in the markets, the gold price remains stable and the attractiveness of precious metal investments increase. A group of bankers meet and decide what will be the price of gold at the exact moment you choose to buy.
The price of gold fluctuates with the influence of various factors such as economic conditions and other changes in the world. It was much easier determining precious metal prices four decades ago when the dollar was backed by the “gold standard” until the U.S. enacted policy changes.
The financial system we have today is nothing more than an experiment. An experiment created when President Nixon decided to disengage unilaterally, the dollar from its gold backing. It was at this time, with free-floating currencies, when he launched a never before experimental financial system that has ended with the current economic crisis.
In August 1971, President Richard Nixon suspended the convertibility of the dollar into Gold and devalued the U.S. dollar by 10%. With this decision, Nixon closed shop on the “gold standard”, which was taken unilaterally by Presidential decree. Following this decision, for the first time in history, currencies did not have any support, but Gold is a commodity and in times of financial uncertainty Gold acts as a currency.
- In June 1973, the price for an ounce had sky rocketed to $ 120, and soon other major countries lifted restrictions on buying gold.
- In 1974 Japan had lifted restrictions on buying gold too, and the continued ascent.
- In 1975, gold futures began trading in the free market and COMEX traded like any other commodity – the demand drove the price of gold up to $ 180
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What Creates the Price of Gold to Fluctuate?
A country with a stable government tells investors that the economic and social policies are consistent and pursue GDP growth. This environment also includes the stability of the currency. However, if the government of a country is unstable this points to the uncertainty of government economic policy and often has a negative impact on the value of the currency.
The Price
Fluctuations in the price of gold may have a sudden impact on the national currencies of the main producers and exporters of gold countries. The two largest exporters of gold in the world are Canada and Australia, so if the price of gold will decrease their currencies, as buyers will have to use them to pay gold. By contrast, countries that are net importers of gold will see the value of their currencies decrease as the gold price increases.
Government intervention
The central banks of many countries participate in the foreign exchange markets when deemed necessary to stabilize the price of the national currency. To try to increase the value of its currency and stabilize at a higher level, a central bank would buy as much as I could. Conversely, if the central bank wishes to reduce the value of the currency, the sale would create a surplus of supply in the markets. Often, mere speculation about the involvement of a central bank is enough to have an effect on the market and create fluctuations in the price of gold.
Reasons to invest in gold
Long considered the ultimate safe investment, gold has the added advantage of maintaining its value even in the presence of expansionary monetary policies.
Gold has been used as a “reserve currency” for decades and acts as an insurance policy against money. It is portable and divisible. Its weight easily determines the value of the object; is indestructible; is easily recognizable and a universal acceptable form of payment. Whether in times of crisis, or in times of prosperity, gold endures.
In fact, Gold has always held its value compared to the rate of inflation over the past 200 years. In other words, the value of gold – or what you can buy in goods and services – has remained fairly stable over time.
Gold is known worldwide as a safe haven. The national currencies have had significant fluctuations while gold has remained fairly stable. It is not directly affected by the economic policies of each country and cannot be repudiated or “frozen” as in the case of some paper assets.
Additionally, gold is one of the world’s most enduring economic goods because it’s more “liquid”. It can be readily sold 24 hours in one or more markets throughout the world. This cannot be said for other types of investments, including stocks or shares of the largest companies and institutions worldwide.
Insurance for a Financial Crisis
For centuries, Gold has been the only monetary device that has survived throughout history. For centuries, Gold has been the only monetary device that has survived throughout history.
Governments have always been unable to stabilize paper money, and historically, this is typically dependent upon public assets, economic policies or issues within the political arena. Yet overall, consider the advantages of investing in gold;
Investing in gold is the closest thing to an insurance policy in times of crisis
It is easy to carry and universally accepted, it can be easily bought and sold around the world
It is a separate asset and changes in price are not so dependent on the current economic situation as in the case of other forms of investment.
Even as the gold price fluctuates, it cannot evaporate the appreciation of precious metals. Gold investments are the best safe haven that is not only a wise investment but also a great choice to preserve the purchasing power of your savings.
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