Although gold is best known for its use in jewellery, it also has increasing applications in the manufacturing of electronic circuits as it is an excellent conductor of electricity.
The primary use of gold however, is as a value store.
There was a time when the more gold a government or central bank owned the wealthier it was. Gold has been the benchmark of a country’s currency, for example, the British pound was once tied to the value of one pound of silver, and this was then changed to gold in 1816.
Other countries also adopted this system and this allowed for the relatively easy interchange of currencies between nations. Due to the limitations of this system however, it was abandoned around the Second World War.
Gold in the cold
Most governments still hold large amounts of gold, however, as do many private investment houses. Why?
Gold is viewed as a “safe” investment, in times of uncertainty such as recession, war, and market crashes, gold is a low-risk investment.
The metal has an intrinsic value that is not affected by government policy or inflation.
Is the dollar to blame?
Most often, there is a strong correlation between the US currency and gold. The US Dollar and gold are inversely related, so, in general terms, when one is up the other is down.
The gold price will continue to fluctuate in accordance with the market’s view on the health and strength on the US dollar in the short to medium-term. Of course, the price of gold is quoted in US dollars, so there will always be a relationship between the two.
With the US trade deficit blowing out to over $500 billion a year, the greenback has become weaker and therefore less attractive. Added to this are increasing geopolitical tensions such as the unrest in Libya.
Inflation? Geopolitical tension?
Some of the factors influencing gold prices are movements in the US dollar (when it’s up, gold is down), production levels, which have been declining in recent years, and demand for the everyday applications we discussed above.
A lot of these factors are a little superficial at the moment. The current main driver of the gold price is speculation on its value due to a combination of all of the factors we have discussed, with the inflation fears and geopolitical tensions the key price drivers at the moment.
How to gain exposure
Investors have often had trouble gaining exposure to gold.
Previously, there were two options. Investors had to either buy physical gold and then hide and protect their holdings, or investors bought shares in gold miners. Both options are problematic for a number of reasons.
With ForexCT, you can gain exposure to gold with a click of a button.
Additionally, with the power of leverage, investors are able to take large positions in the gold market with relatively little money upfront.
To find out more about the exciting world of gold, oil and currency trading, why not register for a free workshop with ForexCT? Find out more on our website at www.forexct.com.au or call us on 1800 367 392.