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Gold And Currency Market Relation Essay

1262 words - 6 pages

Foreign Exchange Market
 FX, forex, or currency market) is a form of exchange

for the global decentralized trading of international currencies.  Virtual
 No one central physical location that is the foreign

currency market  Exists in the dealing rooms of various central banks and large international banks and corporations.  The dealing rooms are connected via telephone and computers

 The foreign exchange market assists international

trade and investment by enabling currency conversion.

Exchange Rates
 Trading on the Foreign Exchange Market establishes

rates of exchange for currency  Exchange rates are constantly fluctuating on the forex market as demand rises ...view middle of the document...

S. and France with large gold reserves.

The Fall of Gold Standards
 In 1934, the U.S. government revalued gold from

$20.67/oz to $35.00/oz, raising the amount of paper money it took to buy one ounce, to help improve its economy.  This higher price for gold increased the conversion of gold into U.S. dollars effectively allowing the U.S. to corner the gold market

Bretton Woods monetary system
 As World War II was coming to an end, the leading

western powers met to put together the Bretton Woods Agreement to plan for the postwar international monetary system
 This agreement called for the following:  Fixed exchange rates between member countries  The establishment of a fund of gold and currencies for stabilization of their currencies, the International Monetary Fund  The establishment of a bank, the World Bank, that would provide funding for long-term development projects

Bretton Woods monetary system
 At the end of WWII, the U.S. had 75% of the world's

monetary gold, and the dollar was the only currency still backed directly by gold  In 1968, a gold pool which included the U.S and a number of European nations stopped selling gold on the London market, allowing the market to freely determine the price of gold.  From 1968 to 1971, only central banks could trade with the U.S. at $35/oz.  Finally, because the system also depended heavily on gold reserves, it was abandoned in 1971 when U.S President Nixon removed the U.S. Dollar from the gold standard

How Gold Affects Currencies
 Gold has a profound impact on the value of world

currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets.  Historically speaking, strong negative gold-Usd correlation has existed in near perfect as investors often hedge against the U.S. dollar weakness by buying gold.

How Gold Affects Currencies
 Gold was once used to back up fiat currencies  Gold is used to hedge against inflation.  Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply.  The price of gold affects countries that import and

export it
 A country that exports gold or has access to gold reserves

will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports

How Gold Affects Currencies
 Gold purchases tend to reduce the value of the


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