January 19, 2018

Investing For Beginners, Stock Markets, Bonds, Mutual Funds, Precious Metals

Forex and Gold

While gold has typically been traded by retail speculators using commodities futures accounts, you can now also trade gold through an online forex broker. Not all forex brokers offer this possibility, but more and more online forex brokers have now incorporated gold trading into their trading platforms and services.

Gold as a Currency

Gold has traditionally been a means of storage of wealth and has been used as a currency for much longer than paper currencies themselves. Nevertheless, returning to the gold standard presents a problem because of the small amount of physical gold available versus the huge amount of paper money now in circulation.

As a case in point, the total amount of gold which has been mined on the planet has been estimated to only be approximately 142,000 metric tons. If you use $1,000 an ounce as an example gold price, this would imply that the total value for all the gold ever mined would be just $4.5 trillion.

How its Relationship to Gold Affects a Currency

To put this in perspective, the United States alone has over $8 trillion in Federal Reserve Notes in circulation or on deposit. This seemingly high amount has largely arisen due to the fact that the U.S. Dollar is a fiat currency that is only backed by “the full faith and credit of the U.S. Government” and not by something intrinsically valuable like gold or silver.

Also contributing to what seems to be excessive overprinting of the U.S. Dollar is the fact that fractional reserve banking is permitted in the United States with the fraction set by the privately-owned Federal Reserve Bank. This allows banks to lend out a multiple of the amount they are required to hold in reserve that can be as large as a factor of ten.

Other factors have also contributed to this discrepancy which has grown over time since former U.S. President Richard Nixon unilaterally took the U.S. Dollar off of the gold standard in the early 1970s. The last national currency which had full convertibility to gold until the year 2000 was the Swiss Franc. This enhanced its reputation as a safe haven currency in times of trouble.

Holding Gold in Reserve

Gold is currently held in reserve by most of the world’s central banks as a way of defending the value of their currency. Nevertheless, only an estimated 19% of all above-ground gold is held in this capacity by central banks.

Furthermore, the U.S. Dollar has been the world’s premiere reserve currency for an extended period. Nevertheless, the value of the dollar has been gradually deteriorating due to inflation and investing in gold is typically used as a hedge against the dropping value of the U.S. Dollar.

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