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
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