The Gold Standard In Forex Trading
What is the Forex market?
Before moving on to the gold standard, let’s review the concept of Forex trading. Forex trading means trading in currency pairs. That is, it is an exchange of one currency for another. Traders make money when market prices fluctuate. After all, the trader gets a profit when buying currency at a lower rate and selling it at a higher rate. These market fluctuations are influenced by several factors, among which we can note the following:
Interest rate:- The interest rate is the rate at which the central bank provides funds for use. When the interest rate increases, the rate for deposit investments also increases. This makes the country more attractive to foreign investors.
When the interest rate decreases, investment attractiveness decreases accordingly, so the exchange rate becomes lower. However, the central bank’s ability to change the rate depends on a large number of factors. For example, with high unemployment rates, the rate is unlikely to be raised. This can lead to a further increase in unemployment because business lending becomes more expensive and it becomes more difficult to operate.
An increase in the discount rate should be expected if the country has a high level of inflation, but at the same time, unemployment rates are acceptable.
Cost of raw materials:- Every country depends to one degree or another on the export of natural resources. Such as oil, coal, ores, and others. And countries whose volume of export of these resources is quite large receive a large profit from these sales. When the price of resources increases, the country’s profit becomes larger, which strengthens the national currency. If such a situation occurs that the demand for these resources becomes less or the supply increases sharply, then the price of the resources falls accordingly.
Export volumes:- Export volumes usually show how attractive a country’s products are. The higher the demand for goods produced in that country, the more foreign currency enters the country, which in turn, increases the value of the national currency.
Trade actions of major players:- In Forex, there are several Forex sessions, which, accordingly, create a 24-hour market. During each session, different financial institutions work respectively. European banks work during the London Forex session, and their actions affect the market during this period.
Political situation:- The international political situation affects the international economy. In case of unfavorable actions of a certain country, sanctions may be imposed on it, which will complicate its functioning and weaken the currency.
New trade alliances and agreements lead to the development of the economy and the strengthening of the currency.
The domestic political situation also greatly affects the currency value. The leadership may come to power with different plans for the development of the economy. Sometimes these plans can be more successful.
General health of the economy:- Perhaps the most obvious of all factors. The strength of the national currency is influenced by the strength of the economy. The most expensive and traded currencies on the Forex market are the currencies of countries with the most developed economies.
As you may have read, the Forex market is currently influenced by many factors, but it was not always like that. At the time of its birth, the market had a completely different appearance, and gold played a significant role in it.
What is the gold standard?
In finance, the gold standard is a monetary system in which the value of a country’s money is directly linked to a fixed quantity of gold. According to the gold standard, a country would exchange paper for gold at a fixed rate, and individuals would also be able to exchange their currency for gold. The gold standard was widely used in the 19th and early 20th centuries but was largely abandoned in favor of fiduciary money schemes.
What is the history of the Forex market?
The impetus for the emergence of the gold standard system was the industrial revolution in European countries and North America. The division of labor led to an urgent need for international trade. To make this process the most effective and simple, they began to use this system.
The main characteristic features of the Paris currency system were as follows:
- Gold played the role of world money
- Import and export of gold were unlimited
- Regulation of the balance of payments balance was carried out at the expense of gold import and export
- Each national currency had a clearly defined gold content
- National currencies are exchanged depending on their gold consistency
The task of the state was to maintain the gold-to-currency ratio, which in turn narrowed the state’s ability to intervene in the regulation of the economy through emission.
After the beginning of the First World War, this system began to change, and the gold standard turned into a gold currency standard. At that time, several currencies of the most developed countries were recognized as world currencies. This system is called the institutional system of the gold exchange standard, and it was approved at the Genoa Conference in 1922.
But already in 1944, this system was changed to the Bretton Woods system. The economies of European countries were greatly affected by the Second World War. And in 1944, this system was adopted. So the US dollar became the world currency. The US dollar had a fixed permanent exchange rate for gold. The dollar was worth a troy ounce. That is, one dollar was worth a little more than 30 grams of gold.
Since that moment, the market has changed many more times, it was influenced by such factors as the appearance of the accessible majority of the Internet and private computers, online brokers, etc. The reformation of the Forex market began just then. And it was then that all these factors mentioned at the beginning began to affect the value of currencies because the currencies of developed countries currently have a floating exchange rate.