Gold Tracks With Dollar

Posted: Jul 25, 2012 12:01 AM

The panic selling in commodities was over almost before it began and prices have once again stabilized to currency levels. 

Gold is down $1.83 to $1,574.92 and silver is down $0.14 to $26.89, bringing the silver/gold ratio to 58.5.  The price movement in gold tracks almost perfectly with gains by the dollar against the euro. 

Commodities were lower again today, but nothing like yesterday.  While crude oil, platinum, palladium and copper all joined gold and silver to the downside, prices were relatively stable to currency. 

Days of panic selling, like yesterday, can give you a skewed idea of how your investments are performing.  Let’s take a look at gold prices relative to currency over the last year with some data from the St. Louis Fed. 

The first chart is the trade weighted exchange rate of the dollar, which has been steadily climbing over the last year. 

The second chart is the price of gold over the last year. 

It is not a coincidence that these charts show opposing trends.  As the dollar gains strength, the price of gold goes down because commodity trades are denominated in dollars. The gold in your safe is not worth less as much as your dollars are worth more. 

What the charts show is that your gold investments are doing exactly what they’re supposed to be doing; holding relative value in relation to currency.  You’ll also notice it’s not a perfect relationship.  The dollar has gained close to 9 percent over the last year while the price of gold has slid closer to 4 percent. 

The data shows global demand for gold continues to hold up well, even though the numbers are masked by the general slowdown in the global economy and the relative strength of the dollar. 

Chris Poindexter, Senior Writer, National Gold Group, Inc