Gold plays a prominent role in both the investment and consumer world. After the Bretton Woods conference in 1944, the use of gold to back up the currency was stopped, global institutions like World Bank (then International Bank for Reconstruction and Development), International Monetary Fund (IMF) were established, and the US Dollar was agreed to be used as an international currency, fixing its value in terms of gold at 35 dollars an ounce. The agreement expired in 1971, and by the year of 1973, the currencies of the most important industrialized countries started to flow more freely.

One of the reasons for its use was that it limited the amount of money to be printed by the nations. There is a limited supply of gold in the world so the countries needed to possess an equal amount of gold to print their fiat currencies.

Even though gold is no longer used as a primary form of currency in developed nations, it still have strong impact on the value of those currencies and it has a strong correlation between its value and the strength of currencies trading on foreign exchanges.

1. Gold is used to hedge against inflation.

During inflation, demand for gold increases on the grounds of its intrinsic value and the limited supply. Gold cannot be diluted and is able to retain value much better than other forms of currency, so at this time the investors buy large quantities of gold when country is experiencing high levels of inflation.

2. The price of gold affects countries that import and export it.

The value of a nation's currency is strongly tied to the value of its imports and exports of gold. The country that exports gold experiences an increase in the strength of its currency when the gold price rises. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises.

3. Gold purchases tend to reduce the value of the currency used to purchase it.

When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency.

4. On certain exceptions gold prices are often used to measure the value of a local currency.

In general, when the price of gold increases, the value of the dollar decreases but many people perceive wrong for gold to use it as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.

When there is high demand from an industry that requires gold for production, this will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time.

Thus gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to be followed and analyzed for its unique ability to represent the health of both local and international economies.