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How Gold Affects the Forex Market

The “gold standard” is a monetary system in which Forex Monarch Review    the values are defined as a determined weight in gold. Under this standard, the institutions issuing the money guarantee the backing of the bills of that amount in gold. In the past, the same was used to commercialize commodities and trade in other currencies. Those who defend this system argue it is more resistant to the expansion of credit and debt, since the money backed by gold cannot be created arbitrarily by the governments. This would prevent artificial inflation due to the devaluation of a currency, and it supposedly eliminates the uncertainty of such currency.

But the gold standard began to show its weaknesses when an economy strengthened, and increased importing foreign services and goods. This would empty out the gold reserves necessary for backing currency, reducing the monetary mass, followed by an increase in interest rates, and a slowed down economic activity leading up to a recession. Then, the low price on the merchandise would generate a massive buy from foreign countries, reverting the process. The oscillating patterns of peak and fall maintained until the bursting of the First World War interrupted the market flow and the free movement of gold.

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Written by Hadriel Sam

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