Gold Soaring or Dollar Crashing?

A lot of media coverage has been given to gold making new all time highs. Unfortunately, if you look closer you realise that it has more to do the currency.

Gold is seen as a safe haven asset class. Though it pays no dividend and has a little industrial value, it is still prized. Its main advantage, is that it does not decay. Companies go bust, other metals rust, options expire, houses burn down.

Some investors claim that gold is a hedge against inflation, but this is a myth. Inflation adjusted, gold has lost almost a third of its value since its last peak. This has been due to increasing supply, both from new mining and governments selling reserves.

If you look at the price of gold in different currencies you realise the current rally is more to do with the collapsing US dollar.

As you can see, the gold price in Australian dollars or Euros peaked in March 2009. When stock markets hit their bottom. A classic risk play when people feared GM’s bankruptcy and protectionism will cause a great depression. But since then the price has fallen.

So the story is not that gold has hit a record high, it is that people are fearing a continued collapse in the US dollar. While the low dollar policy helps exporters, it makes it difficult for US companies to expand overseas and discourages foreign investment in the US. Both of which hamper a US recovery.