Gold & The U.S. Dollar (Part II)

Like no other commodity, gold has captivated human societies since the start of registered time. Empires and kingdoms were created and eliminated over gold and mercantilism. As cultures grew, gold was universally acknowledged as an acceptable form of income. In short, history has given gold a power exceeding that of any other item globally, and that passion has never really faded.

Gold & The U.S. Dollar (Part II)

The U.S. financial system was based on a gold norm until the 1970s.

Supporters of this legal claim that such a monetary system actually contains the development of credit and enforces occupation on lending norms because the amount of credit created is connected to a physical store of gold. It's hard to discuss with that line of thinking after almost three decades of a credit burst in the U.S. led to the financial breakdown in the fall of 2008.

With the European problems decided, investors pushed back into the Euro, a high-risk currency, temporarily trading gold and the U.S. dollar. This persisted for two months in July and August. Yet, once the full extent of the FED guideline was revealed, the money flow was back into gold and out from the U.S. dollar for two causes.

First, the FED approach had now increased the threat of inflation, with gold becoming the haven wall. Secondly, and in a team, the U.S. dollar was no extended seen by the demands and investors as a haven, given the number of dollars now being made. Gold was seen as a safe haven and a hedge against the potential inflation likely following the FED guideline.

The above is a detailed example of how household and international markets affect the money flow between these safe havens. More notably, it is also an example of how a connection between one purchase and another can and does change, no matter how powerful. This does not invalidate the relationship; it is simply a distinction that people and their money drive demand.

On this occasion, investors initially thought of both the U.S. dollar and gold safe havens as they moved out of the Euro and into these safer investments. Once the FED policy had been signaled to the markets, investors determined that gold was the safer bet, not the U.S. dollar, reinstating the classic inverse relationship also.

This is why relational analysis is so effective and delivered; you know where to look and how to analyze what the chart displays. The key here is an interpretation of the fundamental picture after the chart. Besides, this is important to understand and will be protected later in the book.

Of course, as forex traders, the U.S. dollar is paramount, and if we know where the dollar is heading, then this will be remembered in all the major pairs. Whether the money flow is in or out, whether it is haven purchasing or selling for higher risk investments, or certainly whether it is selling to find a safer haven, as in the example overhead, this can all be demonstrated by looking at gold, and its association to the U.S. dollar. It is delivered that you also comprehend the other drivers for gold, such as inflation and the haven situation.

So where is the dollar-gold connection nowadays?

The association has now returned to the standard inverse. Gold moves more increased; the U.S. dollar moves lower, and vice versa. But remember, other influences in this association will likely grow significantly as we move out of the recession and into a phase of early development. Inflation and interest rates will again play a more predominant role.

In summary, the gold-to-US dollar association is pivotal and bridges two capital markets, linking two haven investment classes. It is a human association, with a change in one almost instantly reflected in a distinction in the other.

The relationship usually is inverse, but this can and does change for various reasons and eventually will revert to the traditional inverse one shown above.

But what about other money and its relationship to the precious metal, and the critical cash here is the Australian dollar?

Soaring costs have underpinned the Australian dollar in various things, including gold, copper, iron ore, and aluminum. In addition, just like New Zealand, the economy is underpinned with soft commodities, which have helped Australia weather the global economic storm better than most.

With China as its largest trading partner, demand for base commodities and special metals remains strong, despite the recent slowdown. This has all been recalled in a strong Australian currency, particularly against the U.S. dollar and the Japanese Yen. The association with commodities is also mirrored in the AUD regarding risk needs. As we will see later in the book, the AUD/USD has also seen a close correlation with equity needs.

Another currency associated with gold is, of course, the South African Rand. Although the country remains the biggest gold producer in the world, production is now falling, and the close association that once lived between the Rand and the cost of gold is now breaking down as a consequence.

The issue for much of South Africa's declining industry is the demand for more power in the country. This has led to many mines simply closing or being mothballed, thus stopping the exploitation of the growing demand for gold. This has been echoed in the Rand, which has remained weak, having sold off from the highs of 2002 and in sharp distinction to the Australian dollar.

Gold, for instance, is a commodity that is neither finished nor used in business to any extent and, thus, could never be deemed an example of the commodity sector. Yet gold is also the perfect haven for investors looking for a particular asset in uncertain times. That said, gold is also a hedge against inflation.

Conclusion

If the cost of gold increases, one element could be that the cash flows into gold as a hedge against inflation. Accordingly, in its way, gold demonstrates potential inflation. However, it could also be drawing money flow for haven grounds.