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Wednesday, January 11, 2012

The Gold and Fiat Currency Connection

The correlation between a declining currency and increase demand of commodities is true. While Central Banks and their Governmental employers seek to expand their respective economies with expansionist monetary and fiscal policies, the economic trade off is that these policies depreciates the currency. When this happens, Commodity prices will sky rocket.  If one throws in for good measure the decline of the Euro and the Chinese economy slowing and contracting down, it adds more complexity to the issue. In the meantime, the Chinese Government thinks Gold is a safe bet also! According to the Bloomberg Business week article "China's Gold Imports from Hong Kong Reach Record on Demand".

Looking at the home front, The US dollar is in decline also. The credit for this phenomenon must be given to our intrepid, doughty and myopic political leaders that have been employing strategies to "jump start" the economy.[remove sarcasm now] In the 2000s, the egregious practices of  employing low ball interest rates, sub-prime lending was used to inflate the demand of the Real Estate market, which crashed and burned in 2008. This was followed by a series of large fiscal/monetary stimuli , bank bailouts and other expansionist means to "jump start" the economy.  The economic trade off for these actions: Increased price of Gold and other commodities. Of course, Gold future traders are getting in on the act. In this article, "Gold Futures Close at Highest in Four Weeks as Dollar Weakens", it provides further proof of this connection.


With all this increase in demand with Gold, will it hit a bubble?  Many experts state this bubble will hit for gold, but there are other commodities that can be employed when currency is being devalued. For example, the prices of Orange Juice has soared, (see article "Orange Juice Soars highest since 2006). Is Orange Juice directly related to the depreciation of the currency? Yes, but there are other factors in play. The point of the matter is that there is a relationship between currency valuation and commodities.

Ultimately, the investors who are paying attention to all these moves, and act appropriately, will make money in 2012.

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