Gold was one of the first currencies ever used by mankind and the complex relation between economy and gold still continues today. Gold had even more hold on the economy when countries followed the Gold Standard. Even though the Gold standard is obsolete, Gold has a hand in a country’s economy. Few reasons why gold has the ability to affect economy are discussed here.
Gold is considered safe haven for investment – People prefer to buy gold as a safe investment option especially when a decline is feared in the financial market. Gold is used as a hedge against inflation. Gold is supposed to retain its value better than the currencies and to offset the decreasing value of the stock markets.
Importers and exporters of gold are affected directly – The economy of countries which import and export gold are directly affected by the fluctuations in the price of gold. When there is an increase in the price of gold, the countries which are heavy importers of gold will face a weaker currency value.
Gold is nowadays traded more like a currency and less like a material – People trading in materials have increased and gold is considered and treated more like a currency. When there is a fall in the dollar prices, gold is the option people prefer to trade in and the vice versa is also possible.
Gold prices are inherently tied to the currency prices – It can be seen by analyzing the history of gold prices and dollar prices that both of these tend to move in opposite directions. This is not always the case but the theory holds true for most of the times. When the demand for the dollar goes down, investors around the world and even banks try to purchase and stock up more gold so as to protect themselves against uncertainties. This causes an increase in demand and value of gold and the same holds true in the other direction also.