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Gold is an integral component of both the Forex currency market and virtually every other financial market in the world. It is also a great indicator of investor sentiment.
Historically, gold was the precious metal that backed all currencies. It wasn’t until the 20th century that the gold standard was no longer used to back currencies. The reason this commodity was used is because since the beginning of history, gold has had enduring value as a currency in of it itself. It has only been relatively in recent history that it is no longer used as currency.
Even though it is no longer used as currency and no longer used as a hard asset to back currencies, it still has a strong relation to the currency market and every other financial market in the world. Here’s how it behaves.
Gold is looked at as probably the safest investment in the world. The US dollar is pretty close, but gold still had enduring strength, evidenced by history. When the global market tanks, gold rises. Even when investors think the USD is shaky, they tend to run to gold. So when a recession is about to start, look for gold to rise.
Gold is also an indicator of economic recovery. When there are roomers of a recovering economy and even the stock market rallies accordingly, watch what gold does. Gold prices have the final word on whether investors truly believe there is a recovering coming.
If investors truly have confidence in the global economy, the price of gold will decline. If the stock market rallies and the gold prices continue to rise, you can expect that the rally was just short term and will not be sustained.
In order for there to be sustained economic recovery, investors must believe that the fundamentals of the economy is healthy or becoming healthy. Once they believe that, they will take their money out of gold and place it in more risky investments like emerging markets or tech stocks.
During any kind of economic boom, watch for gold prices to go down. Because the global economy is cyclical, gold prices are bound to return in value over time as well. If you want to follow the crowd, you can find safe haven in gold during down-times and withdraw during good times.
Another reason gold prices have been climbing is that the world is a lot more wealthier than it once was. The world is flush with cash. Even in tough economic times, this century has more cash than it ever did in the history of the world. That means people are looking for places to invest their money.
When they run out of stocks, bonds, T-bills and other securities to invest their money in, they will turn to gold to hold their money. Again, it’s safer than cash and offers a bigger return.
Editor’s Note: To learn more about trading gold, read our guide on how to trade gold futures online.
Tags: economic downturn, economic recovery, forex trading strategies, gold, gold bull, gold market, gold rally, gold standard, gold usd, investment strategy, stock market rally, usd