Gold has always had a crucial role in the international monetary system because it circulated as a currency in many countries of the ancient world before the paper money emerged. But nevertheless, this paper money was still linked to gold after it came to being.
Later on, in the 19th century, with the introduction of “Gold Standard”, which started roughly in 1870 and lasted till the beginning of the First World War, the money supply of a country was connected to gold. This meant that in case a country had a payments deficit it would consequently have an outflow of gold, then a cut in money supply, decreased price level, growth in competitiveness and finally, an improvement in deficit balance.
Gold vs. USD: the importance of Gold
Currently, in investments gold is used as a heaven asset and an asset to diversify portfolios. The use as a haven asset is related to gold’s historical role of an international store of value: historical evidence shows that in times of financial and economic crisis gold retains its value as inflation rises and currencies depreciate. Hence, when economic and financial uncertainties rise in a particular economy or globally, investors buy more gold as demand for haven assets rises. The use as a mean to diversify portfolios is explained by tendency of gold price to move inversely with equity prices. Therefore, when adding a small capital allocation in gold to portfolio holdings, it makes total portfolio return less volatile: when stock prices rise, a decline in gold price lowers the total portfolio return, but in time of a bear stock market, rising gold price raises total portfolio return. Therefore, a small gold allocation in portfolio reduces the difference in total portfolio returns compared with high portfolio returns without gold allocation in bull stock markets and low portfolio returns without gold allocation in bear stock markets. This is the benefit of asset diversification allowing to lower the variability of portfolio return, referred to as portfolio risk. The negative correlation between gold and equity prices was observed also during the 2008 financial crisis, particularly for the US stock market and gold.
Gold vs. USD price
It is important to realize that the XAUUSD price of gold, is affected not only by the US economic and financial conditions, but also by global economic and political factors and changes in global financial markets. As а global commodity traded in US dollars, the XAUUSD gold price is inversely related to the strength of US dollar: when the US dollar strengthens, as evidenced by rising ICE US dollar index USDX measuring dollar’s strength against a basket of six rival currencies, XAUUSD declines as gold grows more expensive for users of other currencies. Hence developments resulting in stronger US dollar such as stronger US economy or expected hike of US interest rates by Federal Reserve usually cause decline in XAUUSD. The fluctuations of gold vs. USD price are displayed on the XAUUSD chart, which displays both the present and the historical price movements of the instrument. By reading full characteristics of the XAUUSD and watching its performance on the charts will help traders and investors to more efficiently develop their trading strategies and make profit during XAUUSD trading.
Undeniably, of all the precious metals, gold is the most popular one as an investment. It has always been a substance of value for thousand years, and nowadays it still remains a valuable and an attractive commodity to invest in.