Goldie Lots

The ultra weak US dollar appears to have a stronger correlation with the stratospheric rise in the gold price, rather than the broadly accepted notion of the latter being an anti-inflationary investment.

Inflation, while up in most countries compared to benign levels over the past decade, does not fully explain why gold prices have now risen more than 30% over the past year.

Gold hit an all time high of US$1,518.6 per troy ounce this week.

It seems investors are more concerned by the Greenback’s continued slide, and perhaps expiring role as the global trade currency, and are looking for a safe haven for their assets beyond the US dollar.

This in itself is driving what could easily become a super bubble in the gold price.

Currency-wise the US dollar is on the ropes.

The $ is down 6.3% against the Pound, 8.5% against the Euro and 13.2% against the Yen for the 12 months to today (26 April).

However for other smaller currencies the movement is much greater.

The Australian dollar is trading at 29 year highs against the Greenback – if the current exchange rate of around 1.07 US cents to the Australian dollar is maintained for the next three weeks (May 21st) – then the 12 month differential between the North American and Aussie dollar will be more than 25 per cent.

An unbelievable return when one considers economic growth in the major developed economies of North America and Europe are spitting out anaemic GDP growth rates of between zero and three percent.

Gold is traditionally seen as a hedge against inflation it now appear to have taken on a secondary role – the second being it is highly liquid and is not the US dollar.

However a problem for the market is that because gold is traded in US dollars then any continued fall in the dollar is only going to stoke prices even higher. The correlation is not perfect and it seems gold has overshot its inflation/currency differential growth.

In the short term it’s even being suggested that gold may rise to $1,600 per troy ounce as the US continues its expansionary monetary policy in a bid to keep the economy afloat; meanwhile its politicians continue to flounder as they struggle to agree on a plan for reducing the country’s national debt.

Meanwhile China is beginning to wave its sabre and could potentially cause a deafening rattle, despite commentators suggesting it would go along with the charade of keeping schtum on the US’s debt problem for fear of the global market losing faith in the Greenback as the global currency of choice.

And therein damaging China due to its mammoth exposure to the US dollar.

It seems with markets already pricing in a decline of the dollar the Chinese now seem to be accepting the inevitable and considering alternatives.

Perhaps a basket of currencies that are less correlated with each other could work?

An alternative could be the Euro of course, however with the issues affecting some member states potentially causing the abandonment of the single currency that wouldn’t be a particularly prudent option either.

Some suggestions are that gold will replace the dollar as the world’s primary traded currency, or perhaps a basket of precious metals?

It’s tricky.

But would it be wise to tie global business to a precious metal that has potential to become a super bubble?