Gold is one of the most heavily traded commodities in the world of foreign exchange (Forex) market, and there are reasons for its unrivaled popularity cast an even longer shadow over other bullions in the market such as silver or palladium.

To understand why Gold has become such a popular commodity and why it is here to stay in the forex trading world, the first thing to understand is the historical role it has played in shaping up the financial sector (globally!).

The Bullion-Dollar Canvas of the Past

While gold’s popularity and influence can be dated to centuries back, it became prominent in forex trading and its popularity as a currency pair took a significant turn in the early 1970s. Here’s how the yellow brick traversed to prominence through the history.

The Bretton Woods System (1944-1971)

After the Second World War, the Bretton Woods Agreement established a fixed exchange rate system where major currencies were pegged to the US Dollar, and the dollar itself was pegged to gold.

This system effectively established gold as the primary reserve asset backing global currencies, and under this particular system, gold had a significant influence on international finance.

Collapse of the Bretton Woods System (1971)

In 1971, US President Richard Nixon announced suspension of the US dollar’s convertibility into gold, effectively ending the Bretton Woods system.

The event, which popularly became known as the “Nixon Shock” marked a turning point in the world of finance as currencies were no longer directly tied to gold, and they began to float freely against each other.

Gold Standard’s Emergence (1970s)

As currencies became fiat (meaning they are not backed by physical assets like gold), gold took on a new role; as a hedge against currency devaluation and inflation. Investors and traders began to pay more attention to gold as a store of value and a “safe-haven asset.”

Introduction of Gold Trading Pairs (1970s – 1980s)

With interest surrounding gold as an instrument beginning to inflate and its role in the post-Bretton Woods era, Forex brokers and markets began to offer gold trading pairs.

Gold was paired with major currencies, primarily to the US Dollar (XAUUSD), and later to other currencies like the Euro and the Japanese Yen.

These pairs allowed traders to speculate on the price of gold in relation to fiat currencies.

The Bullion-Dollar Behavior

Gold is best known for its price volatility which attracted traders looking to profit from price fluctuations. The increased interest in speculative trading, especially during times of economic uncertainty, further boosted gold’s popularity in Forex.

Additionally, over time the financial innovation led to the development of several gold-related financial instruments including gold futures contracts and gold exchange-traded funds (ETFs). These instruments provided additional avenues for traders and investors to access the gold market indirectly.

Yellow, yellow! A Golden Fellow!

It is not lost of anyone who has spent a decent amount of time on a forex trading platform, or on the personal area of a forex broker, just how popular gold is as a commodity; with some of the brokers even providing swap-free accounts for gold.

But then comes the question as to why it is so popular when it comes to forex trading;

• Safe-Haven Asset: Gold is considered as a safe-haven asset especially in times of economic uncertainty or geopolitical instability. When traders and investors seek safety amid turbulent times, they may seek to move their investments from riskier assets like currencies and stocks to gold. This “flight to safety” can lead to increased demand for gold.
• Diversification: traders often seek to diversify their portfolios beyond traditional currency pairs. Gold helps with this diversification since its price movements do not always correlate strongly with currency pairs.
• Inflation Hedge: the commodity is also viewed as a hedge against inflation. Often times when traders predict currency devaluation, they may buy gold to preserve their investments and grow their wealth, which further increases demand for gold.

Covid and Bullion’s Surge in Demand

Gold’s popularity surged during Covid-19 pandemic in 2020 due to several interrelated factors;

• Safe-Haven Demand: the pandemic’s impact was observed globally and brought with it significant economic uncertainty and volatility. Investors turned to traditional safe-haven assets like gold to protect their wealth. Concerns related to the economic impact of lockdown, travel restrictions, and supply chain disruptions led to a flight to safety; with gold as the go-to safe-haven asset.
• Low-Interest Rates: central banks worldwide implemented policies of low interest rates and large-scale economic stimulus to counter the economic effects of the pandemic. With interest rates at historic lows, the opportunity cost of holding non-interest-bearing assets like gold dropped making it even more appealing to investors.
• Weakening Currencies: in bids to counter economic obstacles, governments around the world implemented monetary policies that included massive money printing and fiscal stimulus, which raised concerns about currency devaluation and inflation prompting traders and investors to flock to safer assets like gold as a hedge against the fiat currency devaluation.
• Stock Market Volatility: stock markets saw sharp price movements or volatility at the onset of the pandemic, which led to many investors seeking alternative assets with gold being the top-pick among them.
• Global Economic Uncertainty: the pandemic-led global economic uncertainty especially about the duration and severity of the brunt on the global economy pushed investors to turn to gold as a long-term store of value and a hedge against potential economic shocks.
• Central Bank Purchases: central banks in several countries continued to accumulate gold reserves in 2020. Such hefty purchases, especially from countries like Russia and China, signaled confidence in gold as a reliable asset.
• Technical Factors: Gold broke through significant technical resistance levels in 2020, attracting technical traders and momentum investors who often follow price trends.