By Relmor Demitrius
Gold made front page news in 2009 when it soared past the $1000 barrier and reached new all time highs. People rushed into gold tracking stocks like NYSE:GLD , NYSE:IAU, and NYSE:GDX. Many economists offered explanations for why this happened or found a causal relationship in the economy to justify this event. Whatever the reason, understanding how currency and gold values are affected can reveal the answer and maybe even how, where or even when to invest in the future. Can gold go higher? If so how high? To say gold is high due to inflation is immature and shows a lack of knowledge about the subject. Sorry main stream media gold fly by night journalists, your two bit answers don’t explain even a portion of the story, nor why that statement isn’t accurate right now. To understand this move in gold we must first understand currency and its relationships with hard assets.
Like anything, the value of the dollar is based on supply and demand. First let us focus on the demand side.
If demand of the U.S. dollar increases, and the current supply of dollars remains the same, the value of the dollar will increase. This means that the dollar index, a basket of currencies used to track the value of the dollar, ironically against things measured against simply other currencies themselves, and why they call it a floating currency, will go up. As the dollar index goes up, it signifies that fewer dollars are necessary to purchase the same amount of goods. It also means the price of gold will drop in dollars.
If demand of the dollar decreases , and there is the same amount of supply available, the value of the dollar will drop, and the price of gold will go up in dollars. So as the dollar index goes down, the price of gold should rise, all other factors, of course being neutral.
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