Brexit got everyone talking about the gold standard. So if you’re thinking about investing in international financial markets or engaging in forex trading, you really need to understand what it’s all about.
The gold standard can be described as a monetary system where a nation’s currency value is directly associated with gold. That means that countries have agreed to convert the value of their paper money into a fixed amount of gold.
This means that if a country is utilizing it, they will set a fixed price for gold and engage in buying and selling gold at that set price.
The fixed price is used to then determine currency’s value. For example, if United States set the value of gold at $800 an ounce, then currency value of the dollar will be equal to 1/800th of an ounce of gold.
No. At the present time, the gold standard isn’t being used by any government. The United States stopping using it in 1971 and Britain abandoned it in 1931.
It was replaced with “fiat money” and this system is still practiced today. Fiat money is basically currency that’s used because of a government order which must be accepted as a method of payment.
So fiat money for the U. K. is the Sterling Pound and fiat money for the U. S. is the dollar.
Although gold isn’t used as a standard anymore, it still plays an important role in financial markets. The price of gold is currently determined by the global demand for the precious metal.
Recently there has been a lot of talk from politicians to turn back the clock and return to the standard. This is a result of the political and financial uncertainty surrounding Britain's exit from Europe. As a result, the price of gold has skyrocketed (driven by uncertainty and political volatility).
Regardless of what happens on the global front, gold will continue to play an important role in all nations across the planet. The reason for this is the fact that it’s a major financial asset for central banks and the countries where they’re located.
Banks are also known to use gold to hedge against loans they have made to their respective governments. Further, it’s popularity is enormous in developing countries like India where gold is the leading commodity.So you can expect to keep hearing a lot more about it in the months to come.