GOLD AND FIAT CURRENCIES

Fiat currencies – those currencies that are not backed in their entirety by a physical commodity – have historically had a very strong relationship to Gold – the ultimate physical commodity. In recent years the relationship has become much more volatile, as sectors of the market have become skittish about the long-term prospects of major benchmark currencies. Faith in fiat currency tends to revolve around a handful of benchmarks, including the US Dollar (USD), the Euro, the Swiss Franc (CHF), the Pound (GBP), the Australian Dollar (AUD), the Canadian Dollar (CAD), the Yen (JPY), and the Yuan (RNB).

When major economic or global events rock the market, binary option traders and investors are pushed to move their capital out of riskier assets and into safe havens. Traditionally certain benchmark currencies act as safe havens – the USD, JPY, and CHF, most notably. At times, however, economic uncertainty spreads and reduces faith even in those sturdy currencies. Rising domestic deficits, global recession, or the threat of global war are just a few things that can make binary option traders and investors skittish about putting their capital in any currency, no matter how strong it may seem.

When faith in underlying fiat currencies is impaired, the vast majority of the market suffers. Confidence in manufacturing commodities is damaged, because the prospects for growth are negative in such a shaky environment. Equities suffer from the same distrust of the markets. As a result, investors are often frantically searching for somewhere to put their money, and underlying mineral resources are the obvious choice – Platinum, Silver, and most notably Gold, all see surges when the future of fiat currencies is called into question.

Although relatively rare as a fundamental mover, the collapse of faith in fiat currencies is one of the most certain predictors in the market. It is very difficult to miss the signs of crumbling confidence, and the movements it provokes in Gold are swift, and often enormous. Conversely, recovery can be equally swift and extreme, so it is important for binary option traders to keep a careful eye on the market when playing on this fundamental; be ready to close positions as soon as market sentiment shifts back towards fiat.