Did the gold price really increase this week?
August 5, 2005

The gold price increased by 1.6%, from $430.10 on Monday to $437.12 on Thursday. At the same time the dollar fell 1.7% against the euro and 1.3% against the yen. If we just use those two currencies as a proxy for the dollar then the average decline was 1.5%. That is not materially different from 1.6% given that we are only looking at two currencies. It therefore seems reasonable to state that the increase in the gold price this week was due to a decrease in the US dollar exchange rate.

While more and more analysts now recognize the US dollar exchange rate causes changes in the US dollar gold price, many still do not understand how and why. I sometimes read that a decline in the US dollar made gold less expensive in other currencies, thereby increasing demand for gold and causing the price to increase. That is hogwash. Take this week as an example.

The gold price is up because the dollar went down. But did the decline in the US dollar cause gold to become less expensive in euros? No. The gold price was 354.79 euros on Monday and 354.42 euros on Thursday. Clearly the gold price in euros did not change in any significant way. The same would be true if we consider the gold price in yen.

When the US dollar declines it does not change the gold price in other currencies and it does not change the demand for gold. It merely means that stuff we buy (or price) on international markets with US dollars become more expensive in US dollars.

I also read this week that the increase in the gold price was due to the looming labor strike in South Africa. A major strike in South Africa could have a short-term (emotional) impact on the gold price, but it did not this week.

If the gold price increased because of what is happening in South Africa don’t you think the gold price in euros and yen would also have increased? Why would only the US dollar gold price increase? The gold price in euros decreased by 0.1% and increased by only 0.3% in yen. Because the gold price did not increase in euros and yen I do not think that talk about a labor strike in South Africa had anything to do with the increase in the US dollar gold price this week.

Since the magnitude of the change in the US dollar gold price coincides with the magnitude by which the US dollar exchange rate changed it is obvious that the only thing that changed this week is the dollar.

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

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