Gold is one commodity which is always in the news, be it for its value or for the lack of supply. Ignoring this shiny metal in today’s world is a hard 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 being determined on their sole strength, current gold rates are closely linked to other commodities and have a huge bearing on the global economic scenario.
With almost all nations stocking up on gold reserves, any changes pertaining to gold can have an international impact, affecting everyone, either directly or indirectly. While it might not be evident, devaluation and gold prices do have a close correlation, with monetary policies changing the way gold reflects in our society.
What is 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, currency 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 compared to any goods, product or service it can be exchanged with. On depreciation of a particular currency, the governing authority establishes a new slab compared to a reference foreign currency.
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 any future imbalances. Being an extremely important commodity, gold has the power to influence and impact currencies, and 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 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, a currency automatically tends to devalue. For example, Austria sold around 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 9 month period after which it sold 27% of the gold reserves it owned.
Countries which refrained from selling their gold reserves saw their currencies stay stable, with some of currencies growing stronger on account of their gold reserves.
Should One Buy Gold When a Currency is Devalued?
Devaluation of a currency on account of selling gold generally sparks a frenzy for gold purchases. While on one hand there is a surplus of gold in the market, offering individuals a chance to stock up on it, the prices of gold also start climbing, helping investors and gold owners get better deals on their golden stocks. Buying gold during devaluation of a currency depends on the country of a buyer, with residents of the country whose currency has been devalued generally choosing not to buy gold, on account of the extremely high amounts they might have to spend to buy it with their devalued currency. It has been seen that people from other parts of the globe generally lap up gold on these occasions, stocking up on their supply of this noble metal.
Gold has been an extremely strong resource over the years and has proved itself, offering comfort and stability to owners. As such there is no bad time to buy gold and one should keep an eye for changes in its prices, utilizing every opportunity they get to buy it, ensuring that their finances are safely guarded behind the glow of gold.
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