Gold and currencies: the evolving relationship with the US dollar

Published 31st October 2013

Categories: Investment

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For centuries, gold has played integral roles in the monetary system as a unit of exchange and a monetary anchor. While gold’s official role has diminished under the existing system of floating exchange rates, it has retained several currency characteristics. As such, gold acts as a natural hedge to the US dollar – the world’s reserve currency – and it is significantly influenced by it. Investors use gold as they seek the safety of supply-constrained hard assets, especially as governments implement inflationary policies. Central banks use gold no differently: they view it as an integral part of their foreign reserves, providing diversification and buffering geopolitical and sovereign risks. Looking forward, as the monetary system likely evolves into a multi-currency platform, gold will remain a key asset to balance the risks present in at currencies.