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Gold is a highly sought-after precious metal which, for many centuries, has been used as money, a store of value and in jewelry. The metal occurs as nuggets or grains in rocks, underground "veins" and in alluvial deposits. Modern industrial uses include dentistry and electronics, where gold has traditionally found use because of its good resistance to oxidative corrosion.
Gold continues to climb as US dollar weakens overnight in Asian trading
Gold continued to rise overnight in Asia, advancing towards US$1,170 per ounce as the US dollar index fell almost 0.75% as investors continued to raise concerns over the status of the dollar as the world’s reserve currency. The gold price has risen from around $750/ounce twelve months ago driven primarily by growing fears over inflation and specifically the decline of the US Dollar.
The relationship between the US Dollar and the gold price is one of the longest standing principles in the global economy. The gold price and the US Dollar has a directly inverse relationship, typically a fall in the dollar will prompt an increase in value for gold and vice-versa.
There are two primary factors that govern this relationship. Firstly like all major commodities gold is primarily priced in dollars therefore a weaker dollar increases the inherent value of the commodity particularly for investors outside the US. For example as the value of the dollar declines against the Euro, someone investing in gold with Euro’s would be able to buy more physical gold per Euro invested.
The second and perhaps the most crucial factor relates to international reserves. All nations, through central banks, store a proportion of their wealth in a ‘reserve’, which exists to protect the relative value of the economy’s wealth.
Whilst there is some level of diversification, economic reserves are primarily held in US Dollars and a combination of other assets including Gold and other major international currencies.
In general terms the world’s primary reserve currency is used as the ‘international currency’ with most subsequent currencies ‘pegged’ against relative value against the reserve currency. Historically reserves were principally held in gold, however since the ‘gold standard’ was removed in 1973, currencies and specifically the US Dollar have increasingly taken precedence.
So with the US Dollar suffering some of the heaviest devaluation for several decades, the gold price continues to gain support as investors and central bankers, sell dollars and buy gold due to perceptions of greater stability in the physical asset against volatile currency markets.
Recent market commentary and analyst opinion has been mixed in reference to the immediate outlook for the gold price, considering the substantial rally over recent months. Some are predicting a short term dollar recovery which will pressure any further gains while elsewhere others have more bullish views for future gold prices, with some considering $1,200 gold in 2009 as a real possibility.
