An uneasy dance of dollars and Wall Street seems to be taking place. As the dollar weakens, gold is surging on speculation that it may reach the highs of 2020. Is the dollar weak or is it simply making other currencies stronger?
In order to make a logical conclusion, it is necessary to understand how much of the rise in gold prices can be traced to speculation and how much is a consequence of the collapse of the dollar. At this point, it is hard to say. However, if one ignores the fall of the dollar, gold prices have been rising steadily over the past year or so. Some analysts believe that the strong rise is due to speculators wanting to catch a glimpse of an imminent US recovery.
More specifically, it is probably fair to assume that the current rally is the start of a bull market. Although none of the reasons to expect a bull market have been established, it is hard to see how they could be ruled out. The combination of the improved stock market, rising commodity prices, better world economic conditions, and fears about the global economy seem to support this conclusion. Indeed, the global financial and economic situation looks very good right now.
This perceived strength in the world economic situation has certainly helped the dollar, and therefore, gold prices. Once you realize how precious metals are priced, you will be able to see why they are rising so dramatically as well.
This kind of fluctuation can often be attributed to investors attempting to anticipate future developments and improve their portfolio by taking advantage of the weakness in the world economic situation. One way that they do this is by buying gold as a hedge against inflation. With inflation, there is less money, so there is not a lot to invest in today.
This means that gold will appreciate in value and consequently the value of the local currency will weaken relative to foreign currency value. Conversely, when the economy is improving, such as it has been in recent years, investors with wealth will buy the U.S. dollar and increase the value of the dollar, driving up gold prices and causing them to appreciate as well.
An important question to ask is whether the rise in gold prices is a consequence of speculation or if this is the beginning of a long-term trend. If the latter, then we should expect gold prices to continue to rise. On the other hand, if the former, then the first-year rally may be the beginning of a bear market.
There is no arguing that the dollar weakens every time the Federal Reserve increases the number of interest rates that are paid on the dollar. In the case of gold, the short-term demand for the yellow metal is pretty consistent and does not seem to show any signs of waning.
Speculative investors are certainly being stirred by the deteriorating economy and because of this, their “buy” orders have skyrocketed. And, just as with any other speculative investment, some people may lose out as a result of their poor judgement and what could be an easy way out of risk for others.
After all, it is very difficult to make a real investment in the price of gold, as there is no tangible product that could be sold. One might wonder, however, whether there is something concrete that could be done to prevent a break down of the dollar? We are very worried about this and believe that these two factors combined can spell trouble for us.
Gold prices are low today because the dollar is too weak. In order to make a wise investment, therefore, it is best to consider the threats from both sides of the coin.
Are gold prices as a result of speculation or are we witnessing the beginning of a new trend? We think it is more likely that it is a reaction to the weakening dollar and the increasing challenges of our own economic difficulties.