Gold is a commodity used by investors for thousands of years. When it comes to trading, gold is paired against the world’s reserve currency (USD) and acts just like any other currency pair. The XAU/USD shows the changes in price like other currency pairs on the forex dashboard. Offered in the form of a CFD (Contract for Difference), investors can easily go short or long on gold. The only difference is the blocked margin for gold is bigger than the margin required for trading a traditional currency pair.
The History of Gold in Financial Systems
One thing to keep in mind about gold is that it is a good store of value. It has been for thousands of years, it is today, and will be in the future. Maintaining value for this duration of time is no small feat. Kings, governments, and systems have come and gone but gold remains the very anchor to price stability.
Gold means different things for people in different parts of the world. In the U.S. for instance, gold isn’t viewed as a store of value because the U.S. Dollar is considered relatively stable. The USD has kept its strength over time as the demand for the world’s reserve currency comes from abroad. However, in parts of the world where political instability can lead to inflation, gold plays a crucial role in protecting people’s wealth. People would rather trust gold than the local currency as the latter is subject to inflation. Think of countries like India, the Middle East, and recently Turkey, Argentina, or Venezuela; when a currency loses value, gold keeps its value intact.
After the Bretton Woods conference in the United States, Americans pledged to exchange dollars for gold. Effectively, the U.S. dollar was ‘as good as gold’, as long as the gold standard held. In 1971, the Nixon administration decided to scrap the gold standard and in the years to come other nations followed suit. Today’s financial system is no longer backed by gold, but people still go to extreme lengths to mine it and store it.
Gold and Inflation
Paper money, or fiat money as we know it today, has existed for a relatively short period. If one checks the world’s monetary history, the current financial order is quite recent.
Hence, we’ll never know if gold will end up playing an essential role in future financial systems or if the current system will stand the test of time. However, we do know that gold is a store of value, it protects against inflation, and represents a hedge against adverse government spending. Moreover, gold is offered by all brokers and provides excellent opportunities to diversify a portfolio.
- XAU/USD is the trading pair for gold.
- Gold is a safe haven against inflation.
- Gold is a great diversification tool in any portfolio.
- Trading gold is like trading any currency pair against the USD.