Even from ancient times, gold is used as a currency for buying and selling goods. Though centuries passed, gold is still one of the major factors determining the currency prices and there is a noticeable relationship between gold and paper currency. Gold price and price changes affect national currencies in many ways.
- The most noticeable relationship is for currencies having gold standard. In this, gold is kept as security for the amount of money printed.
- Investors tend to buy more gold when there is high inflation. Gold is considered as a good investment during inflation as it is more able to retain its value because of limited supply.
- Gold price changes can directly affect the currency prices of nations that import or export gold. Countries that export gold can benefit when the price increases and countries that import gold can suffer.
- Central bank gold purchases and selling can also greatly affect the value of the currencies. The general idea is that purchasing of gold reduces the value of currency used to purchase it because the central banks need to print more money for this purchase resulting in higher inflation.