Learn Forex Trading Lesson 7a: Trends in Gold

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Gold price is a key factor in forex

Gold price is a key factor in forex

From the first newsletter in our series, we mentioned the fact that currency prices were tied to the price of gold as from the times of the First World War up until 1971. Even though this regime has been abandoned, gold is still seen as a safe haven investment, as its value remains fairly stable even in the face of the worst of economic times.

However, there are newer trends that have occurred as a result of the global financial crises that have been witnessed in the last thirty years. Fears regarding the price of crude oil, the security of the US economy and the attendant risk aversion is now driving a demand in gold which is causing its price to rise. Presently, the price of gold is at a record-high of $1,422 an ounce.

To better understand this interplay, we need to elucidate on some key points.

1)      The state of the US economy is a key factor here. Many countries have their external reserves denominated in US dollars. The price of crude oil is denominated in US dollars. The US dollar is the key global currency for international transactions. It is therefore not surprising that the global economic meltdown of 2008 emanated from the collapse of the subprime mortgage subsector in the US. Considering that the housing/real estate sector contributes almost 80% of the GDP in the US, as well as offering employment to more than 122 different professions in the US, it is not hard to see why events played out the way they did in October 2008 and beyond.

2)      The attendant collapse of stock markets across the world, commodity prices as well as the surge in crude prices, drove investors to put their money in gold holdings. We all know from our Economics, that when demand increases proportionate to supply, we will see an increase in the price of the commodity at stake.

As we get into 2011, we see that most of the factors that caused the 21st century “gold rush” are yet to abate. The US economy is yet to fully recover. The European Community is still trying to deal with problems in Greece to Spain to Ireland. Crude prices are racing towards the $100/barrel mark. It is obvious that we are going to see continued interest in gold from investors, and the price of gold looks set to break new frontiers as we head into the second decade of the 21st century.

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