Gold is one of the world’s oldest and most precious metals. It’s what we award athletes who finish first, it’s designed into the jewellery we give loved ones, and some cultures have even gone so far as to build entire temples out of it.
But aesthetics aside, gold is – and has been for a long time – crucial to the world’s economy.
Gold was first used as currency since the Byzantine Empire (395–1453AD), most notably the pure gold coin the Byzantine solidus.
More recently, gold was used as the world reserve currency up until 1971, when the US abandoned the gold standard. Before then, the value of a country’s currency was directly linked to the value of gold.
Rather, paper money had to be backed up by an equal amount of gold in a country’s reserve, which in most cases was gold bullion.
So is gold a commodity? A currency? Or a combination of the two?
The free market system we currently trade in (post-gold standard) allows gold to act very similarly to a currency.
Gold is not often used for direct payments; however, it is highly liquid and can be converted to cash in most currencies very simply.
That said, gold is, first and foremost, a commodity often grouped with other precious metals, such as silver, platinum and palladium. These can be traded as part of our Precious Metals Index.
Gold is a global commodity and can be traded in many currencies. However, the typical market quote is to price gold in "US dollars per troy ounce".
This relationship to the US dollar is one of many important factors that influence the price of gold, which we’ll now take a look at.
Unlike oil or coffee, for example, gold isn't consumed (although sometimes chefs get bored with edible ingredients and add them in). Also, as it is virtually indestructible, most of the gold that hase ever been mined is still around to this day. As such, the price of gold is moved more by a combination of supply and demand, and investor behavious.
Nowadays, when other investments seem too risky, gold is often seen as a "safe haven".
It generally performs well during global crises such as wars, terrorist attackes, and pandemics, to name but a few, as it is seen as an attractive hedge.
For example, if the US central bank, the Federal Reserve, decided to cut interest rates, this would usually weaken the US dollar and lift the price of gold.
It's therefore important when trading gold to keep an eye out for any major economic announcements that could impact inflation - and in turn gold - such as unemployment figures, interest rates, price changes in energy or food, and even natural disasters.
Over many centuries, the gold trade has seen it all. Empires have risen and fallen, economies have prospered and crashed and though demand has waxed and waned, there has always been a market for gold. This is why many see it as a safe haven investment. Still, like every other investment, its prices will fluctuate over time – which creates opportunities and risks for traders.
However, gold is just one of a number of options open to commodities traders, with many preferring to focus on oil, grains or coffee. To find out more visit CMC’s Commodities Market.
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