Gold prices at their highest level ever, or are they really?

gold_10_year_o_usdToday’s new stories shout how the price of gold is at its highest ever, but truly, they are only speaking of prices in American dollars.  The fact is, gold prices are only considered their highest ever in American dollars, because the dollar is much weaker now, in essence meaning it will take more dollars to buy the same amount as before (as compared to other currencies).

If you were to compare their prices in say Euros, Canadian dollars, or Australian dollars for example, this would not be the case, as they peaked several months ago (back in the beginning of this year). See the graphical illustrations below.

In Euros:

gold_10_year_o_eur

In Canadian Dollars:

gold_10_year_o_cad

And in Australian Dollars:

gold_10_year_o_aud

“What is interesting is that we move from high to high every day (in dollar terms), but in euro terms, we’re still far away from the old high,” said Michael Kempinski a trader at Commerzbank.

So, what causes the weakness (or this weakness) in the US dollar and what impact does a weak dollar play on other commodities such as Oil with regards to prices in the US? Is it a good or bad thing to have a weak dollar?

First, what causes a weak dollar? There are a number of causes, but the basics are as follows:

    Federal Reserve Comments

  1. Whenever Federal Reserve officials comment about how they favor a policy of having a weak dollar, it can help invite steep declines. This is because public comments from the Fed about support of a weak dollar may mean that are taking action to promote it.
  2. Lack of Diversification

  3. Many of the world’s central banks use the dollar as a key holding in their reserves. When the dollar weakens, countries grow concerned about the value of their holdings. This can spur dollar selling, leading to further declines.
  4. Trade Deficits

  5. A growing trade deficit can devalue the dollar. When the deficit widens, the supply of dollars in world markets increases, lowering demand.
  6. Inflation

  7. When inflation rises, the dollar can weaken. This is because the demand for various goods and services is strong. To prevent inflation from running away the Federal Reserve will raise interest rates, causing the economy to slow and the dollar to decline.
  8. Fear

  9. During times of crisis, many people will become very pessimistic about the future. At which point they will begin selling dollar-denominated assets and purchasing more tangible assets, such as precious metals, until the uncertainty passes.

Next,what impact does a weak dollar play on our commodity prices, or the price you pay at the pump? You probably already know the answer to this, you’re going to pay more when the dollar loses value. The same concept as above applies, it takes more dollars to purchase the same amount of oil.

Finally, what’s best, a weak dollar or a strong dollar?

dollarfall259

I think this quote sums it up very well, “A weak dollar can be good for the U.S.   economy, because it makes American exports cheaper and, therefore, helps close the trade deficit. But over the long term, the value of a country’s currency is seen as a verdict on the overall health of its economy.” Bottom line, it’s good for the short term, but if it goes on for too long we risk losing dollar hegemony and push foreign countries to cut reserves in our currency.

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