Currencies and Gold

 

Lately gold is not headlining news stories as it was last year. Instead we are hearing about the Euro and all of its issues in Greece and Spain. With the negative news many of our customers are asking why gold has not been going up like it was before and has even been seeing some corrections. One would think that with the Euro troubles that the value of gold would be headed up and not down.

I will attempt to explain the basics of why this is not happening, but let me first say that I do not profess to forecast what the value of what gold's price will do. I simply try to logically guess the next direction of golds value.

In terms of the Euro crisis and gold we must first start with the most basic principle that affects gold pricing for us, we price gold in dollars. When the Euro falls in value the dollar appears stronger in the world economy. Our dollar buys more Euros and therefore its value appears to be going up. Even if our dollar is falling in value if the Euro is falling faster our dollar appears to be better value.

As the world turns, all currencies are affected in this type of manner. Dynamics of currency trading are complicated and have many facets, but when we see things like gold, oil, and even stocks falling as the Euro falls we can attribute it to the fact that the world is valuing the dollar higher compared to the Euro. I am ignoring other currencies in this scenario, but the principle remains the same. If the world values dollars higher then the number of dollars it takes to buy things like commodities, oil, or even stocks goes down.

A basic principle with gold is that a person is usually not buying it to make a gain, but rather to maintain buying power. Of course there are always factors that can produce gains or losses outside of normal trading ranges. But gold seems to be the most steady of the commodities. I liken it to a tree. The larger the base of the trunk the less likely it will be swaying in the wind. The taller and thinner trees blow to and fro while the thicker based trees sway, but they do not swing wildly in the market winds. When we look at the long term charts of gold it has been on a steady increase which amounts to a good strong base in value. A ten year chart on gold shows that since 2005 when gold hit $500 it has been on a slow steady increase. It blipped up to $1900 last year, but still fits nicely into the $1550-1650 range today.

Based on what can be seen it appears that gold will continue its upward direction in the near term future. Ultimately the value of currencies appear to remain in decline and hence we could continue to see rises in commodities such as gold. Ultimately, I do not think that our nation will recover with hyper inflation or sky high gold prices, but a wilder thought is that just as Europe may not be able to recover with the Euro we may not be able to recover with the dollar either.