Monday, October 12, 2009

Gold and the Dollar

Reuters has a very interesting story on why the price of gold is increasing so rapidly. The article states:

Spot gold and U.S. gold futures, both of which are priced in dollars, have gained ground in league with the U.S. currency's losses. Gold hit a record high earlier on Wednesday at $1,048.20 per ounce .

But gold priced in other currencies has seen nothing like the same sorts of gains. While the precious metal has gained almost 20 percent in dollar terms so far this year, gold priced in Australian dollars has fallen 5.6 percent .

Kitco said its index aims to determine whether the value of gold is actual, a reflection of changes in the dollar value, or a combination of both.

"When you take the dollar out of the equation, which this basket does, and you start looking at gold in the six-currency basket, you realise that this has been a dollar story," Kitco senior analyst Jon Nadler told Reuters on the sidelines of the Commodities Week Europe conference in London.

The price of gold is going up rapidly in dollar terms, not necessarily in other currencies. This reflects the weakness of the dollar, more than the strength of gold. If gold stabilizes or increases in this range, this means the strength of the dollar is evaporating before our eyes.

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