Understanding Currency Pairs: Majors, Minors and Exotics
Every forex quote is a relationship between two economies. Learn how pairs are quoted, why the majors dominate liquidity, and what changes when you trade minors and exotics.
Read moreFew assets carry the history, or the emotional weight, of gold. It has served as money, as a store of value and as a reserve asset for centuries, and it remains one of the most actively traded instruments in global markets. In portfolio construction, gold is most often discussed as a hedge — a holding that may protect wealth when other assets struggle. That reputation is partly deserved and partly overstated. Understanding both sides is the key to using it well.
What XAU/USD represents
Under the ISO 4217 standard, gold has its own currency-style code: XAU, representing one troy ounce (approximately 31.1 grams). XAU/USD is therefore the price of one troy ounce of gold in US dollars, and it trades much like a currency pair — around the clock during the trading week, with deep liquidity in the London and New York hours. Because gold is priced in dollars, its movements reflect both the metal's own supply and demand and changes in the value of the dollar itself.
What drives the gold price
Real interest rates
Gold pays no interest or dividend. When inflation-adjusted yields on government bonds rise, the opportunity cost of holding a non-yielding asset increases; when real yields fall, gold tends to become more attractive. Historically, this inverse relationship has been one of the most important influences on the price — although it is not constant, and it has weakened in some periods.
The US dollar
A weaker dollar makes gold cheaper for holders of other currencies, which can support demand. As a result, XAU/USD has often moved inversely to broad measures of the dollar's value.
Central bank demand
Central banks hold gold as part of their official reserves. According to the World Gold Council, central bank purchases exceeded 1,000 tonnes in each of 2022, 2023 and 2024 — a historically high pace, reflecting a desire among several reserve managers to diversify away from concentrated currency holdings.
Risk sentiment and uncertainty
Geopolitical tension, financial-sector stress and concerns over fiscal sustainability can all drive demand for gold as a perceived safe haven. In March 2025, gold traded above US$3,000 per ounce for the first time.
When gold has hedged — and when it has not
Gold's defensive record is real but uneven. It has frequently performed well during prolonged periods of monetary easing, currency debasement fears and geopolitical stress. Yet it is not a guaranteed shelter in every crisis. During the acute "dash for cash" of mid-March 2020, gold sold off sharply alongside other assets as investors raised liquidity — before going on to set a then-record above US$2,000 per ounce in August of that year. In periods of rapidly rising real interest rates, gold can also struggle for extended stretches.
Gold is best understood not as a guaranteed hedge, but as a diversifier whose behaviour differs from that of equities, bonds and fiat currencies.
Gold's place in a diversified portfolio
The case for gold rests on diversification: its drivers are different from those of company earnings or bond coupons, so it may behave differently when those assets are under pressure. Allocation is a matter of objectives and risk tolerance, but in practice gold is usually held as a modest portion of a broader portfolio rather than a core holding.
| Illustrative portfolio profile | Illustrative gold allocation | Rationale |
|---|---|---|
| Conservative | 5% – 10% | Diversification and tail-risk mitigation alongside a larger fixed-income base |
| Balanced | 5% – 8% | Offsets part of equity and currency risk without dominating returns |
| Growth-oriented | 3% – 5% | A smaller defensive sleeve within a higher-risk allocation |
Illustrative ranges for discussion only; they are not recommendations. Appropriate allocations depend on each investor's objectives, circumstances and risk tolerance.
Ways to gain exposure
- Physical gold — bars and coins offer direct ownership but involve storage, insurance and dealing spreads.
- Exchange-traded products — funds backed by physical metal provide convenient, liquid exposure.
- Futures — standardised exchange-traded contracts, widely used by institutions for hedging and trading.
- Spot XAU/USD — traded over the counter, usually on margin, allowing both long and short positions with flexible sizing.
Risks to respect
Gold can be volatile, with daily moves often larger than those of the major currency pairs. When traded on margin, that volatility is magnified by leverage, and position sizes should be calculated with care. Gold generates no income, so its returns depend entirely on price change. It can also underperform for long periods, testing the patience of investors who bought it as insurance.
Used thoughtfully — sized modestly, held for its diversifying qualities and monitored within a disciplined risk framework — gold can play a valuable role in a well-constructed portfolio. Treated as a guaranteed safe haven, or traded with excessive leverage, it can do the opposite. As with every market, understanding comes before allocation.
This article is published by OT PMC Research for general education and information only. It does not constitute investment advice, a recommendation or an offer to buy or sell any financial instrument, and it does not take account of your objectives, financial situation or needs. Figures labelled "illustrative" or "example" are hypothetical.