Why is Gold So Expensive?
October 13th, 2009 Posted in Oil and Precious Metals
Anyone who reads newspapers or follows economic blogs and websites probably heard that gold is breaking new record highs on a daily basis now. But does anybody understand the reason why?
Frankly, the reason, or should I say reasons, are more simple than you can imagine. The basic thing you need to understand is that gold, much like all the other commodities, is valued in American Dollars. This so called elementary knowledge is crucial for understanding as it is the leading reason for gold’s prices nowadays.
In the past few weeks, the Dollar weakened against the major currencies, especially against the EUR. Consider that the EUR/USD pair was traded around the 1.40 level just 2 months ago, but is now trading above the 1.48 level. This is an incredible rise for the most traded pair in the market, and it just reflects how weak the Dollar has become.
The reason that the Dollar is dropping so severely, believe it or not, is purely because the U.S economy provides signs of recovery. This creates a very interesting phenomenon. Investors see the recovery signs, and assume that if the American economy is recovering, so will the rest of the major economies of the globe. The idea behind it is that half of the world consumption comes from the U.S economy, and thus if Americans feel safer to spend, then everyone else will benefit as well. This assumption is leading investors to put their faith in other assets and not in the Dollar, which in turn, weakens the greenback.
Now back to gold, it is a relatively safe assumption to make, that for as long as the Dollar continues to weaken, especially against the Euro, we will see gold prices rise higher and higher, and who knows, an ounce of gold could even reach $1,100!
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Tags: EUR, Euro, Forex, Forex Trading, fx, FX trading, Gold, Gold trading, oil, oil trading. dollar, USD
