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Gold and Devaluation – What is the relationship?

Introduction

Happy Friday! A warm welcome to both loyal and new viewers. Today's topic of conversation, is about understanding the relationship between Gold and the effects of a devaluation.

Gold is one commodity that is always in the news, be it for its value or the lack of supply. Ignoring this shiny metal in today's world is an arduous task, given all the attention it garners. For centuries gold has proved its mettle, helping build kingdoms and legacies, offering respite to the power-hungry world. While the past saw gold prices determined on their sole strength, current gold rates are closely linked to other commodities and have a considerable bearing on the global economic scenario.

With almost all nations stocking up on gold reserves, any changes about gold can have a global impact, affecting everyone, either directly or indirectly. While it might not be evident, devaluation and gold prices have a close correlation, with monetary policies changing how gold is reflected in our society.

What is a Devaluation?

Currency evolved from the concept of barter, wherein goods and services were exchanged for other goods or products, completing a circle of sorts. Today, money acts as the standard used by people across the globe to avail certain products or services. Devaluation refers to the practice of reducing the value of a particular currency in comparison to products or services. Depreciation of a currency is usually compared to a commonly used currency for trade, such as the US dollar.

Relationship between Devaluation and Gold

Gold has traditionally been viewed as a hedge against inflation, offering stability to a nation's economy and acting as a safety net in times of emergencies. Almost every country invests in gold, storing huge reserves and purchasing more quantities to offset future imbalances. The commodity plays a vital role as it can influence and impact currencies. Any change in stock markets has a direct bearing on how gold behaves. History has witnessed that gold prices are inversely proportional to market performances, ensuring gold owners are not at the mercy of market forces.

While the devaluation of a currency is seen as a strategic move, it is closely related to gold. When a country sells a chunk of its gold reserves, the money automatically tends to devalue. For example, Austria sold 58% of its gold reserves, leading to its currency falling by almost 31% over a period of 18 months, a stark indicator of how everything in this world is closely correlated. Similarly, Portugal witnessed its currency devalue by almost 26% in the nine months. It sold 27% of the gold reserves it owned. Countries that refrained from selling their gold reserves saw their currencies stay stable, with some currencies growing stronger on account of their gold reserves.

Should One Buy Gold When a Currency is Devalued?

Devaluation of a currency on selling gold generally sparks a frenzy for gold purchases. An excess supply of gold in the market offers investors the ability to stock up. As a result of investors stockpiling, current gold owners will liquidate their position to capitalise on their profits.
Investing in gold during a devaluation depends on the buyer's country. The buyer country will not buy gold because of the devalued currency.

Gold has been a powerful resource over the years and has proved itself, offering comfort and stability to owners. As such, there is no wrong time to buy gold. Keen investors should monitor prices and seize opportunities where available.

Source

Bank Bazaar

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