Like the case with bitcoin, whereby people haven’t defined whether it’s an investment asset, money, or a payment system, the same case still holds with gold.
Folks can’t agree on what real gold is. The advantage of understanding whether gold is an asset, currency, commodity, or collectible is to enable one to adopt the best gold investing philosophy.
So, what’s gold?
Most people feel that a form of gold-standard should be reintroduced given the instability that occurred during the first decade of the 21st century.
In fact, under the current free-market system, gold is a currency.
Usually, it’s thought in relation to the US dollar as it’s priced in US dollars with a rough inverse correlation existing between gold prices and the US dollar.
Basically, gold has got its price, which fluctuates relative to the other forms of exchange like the USD or the Japanese Yen.
Moreover, gold can be stored or bought, and the fact that it’s not occasionally used as a payment method; its liquid hence can be converted to cash easily in any currency.
Therefore, gold has tendencies similar to those of a currency. At times gold is likely to go higher, and there’re those moments when the other currencies outperform.
The best time when gold is most likely to do better is when the confidence in the paper currencies is completely waning.
Furthermore, gold does better when there’s a likelihood of war or when there’s no confidence in the Wall Street trading instruments.
Also, gold can be traded in a plethora of ways that include buying physical gold, gold ETFs, futures contracts, or whereby investors participate in price movements without necessarily owning the underlying asset.
How Does Gold Compare with the US Dollar?
When talking about gold and the US dollar, it’s arguably one of the most exciting relationships.
Usually, it has been the case of a declining dollar resulting in the price of gold rising. However, in the short-term, the relationship is not always true.
Like any major currencies do, the US dollar and gold also do share a relationship. However, both are dynamic with over one simple input.
For instance, gold is impacted by more than war, the US dollar, or inflation.
Therefore, it’s a global commodity reflecting global sentiment, and not merely one economy sentiment or group of people.
Nevertheless, gold provides an excellent backup for paper money, which is used for purchasing goods and services.
Gold won’t serve that purpose; however, the free markets allow that gold is used as currency for those willing to do so.
Currently, gold is thought of as a commodity that folks decide to invest in, especially when it’s advantageous.
Also, it can be a means to hedge economic insecurity as well as counter the potential threats to the current paper currencies.
On the other hand, Australia ranks highly as the best supplier of gold across the globe, meaning that both the Australian dollar and gold tend to move in a similar direction.
The Swiss Franc as well tends to follow the same path.
Gold Prices are Often Used to Measure the Value of a Local Currency
Many people mistakenly use gold as a definitive proxy for valuing a country’s currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.
For example, if there is high demand from an industry that requires gold for production, it will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time.
Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, or any currency, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.
The Bottom Line
In a free market system, like the other currencies, gold should be looked at as a currency.
Trading gold as a currency can mitigate the risks to paper currency as well as the economy.
Besides, it’s forward-looking, and if an individual waits until a disaster happens, then once it has moved to a price reflecting a slumping economy, it might not provide an advantage.