They form an inverse relationship between one another.
However, recently, gold has been a rebel!
As we all know, the U.S. dollar is coming up strong recently due to the racheting recovery in the economy. But the problem is, as the U.S. dollar is rallying, the gold prices seem to follow it up at the same time.
This is obviously weird!
First and foremost, why does the price of gold drops when the price of the dollar rises?
Simple, it boils down to the topic of investment. When the price of the dollar rises, people start to invest in the dollar and sell away their gold. Conversely, when the price of the dollar drops, they start to place their bets on gold.
In this case, the price of gold is rising despite the price of the dollar rising is probably due to the fact that people are insecure and unsure about the strength and resillience of the U.S. dollar. There has been a lot of ambiguity in the various industries lately, i.e. housing, consumer products, and banking.
Meaning to say, even though the U.S. dollar is recovering, the investors are not sure how sustainable the recovery actually is. Many feel that it is safer to place their bets on gold because they trust that the U.S. dollar will plummet once again later on.
Why will it plummet you might ask. Well, simply because the financial crisis is not exactly over, the mortgage loans are still piling up and alot of the mortgage are considered to be "underwater" (which means that the value of the house is below that of the mortgage).
At the end of the day, there might be yet another housing crisis and then people will sink into depression again and the U.S. dollar will definitely plummet.
Also, we must realise that countries are openly devaluing their own currencies in an effort to support exports. This is probably one of the industr where they can get huge trade surplus to pay off their debts.
Also, people trust that it is way safer to invest in gold than to invest in the dollar because the Western countries are still incurring up a huge load of debts. If they are not able to clear it in time, they will just keep on accumulating and this is definitely going to hit the U.S. dollar hard.
Nonetheless, if the U.S. dollar continues to rise continuously, the prices of gold will definitely drop. They will eventually diverge for sure and that is a hardcore fact of economics.
But for now, gold is definitely tagging behind the U.S. dollar until the citizens trust that their investment in the U.S. dollar is actually safe.
Credits -hiiraan, -sunshine, -australianmine
No comments:
Post a Comment