There is a strong correlation between the price of gold and the value of the Australian Dollar on a weekly and monthly basis. The Australian continent is rich in precious metals and traders can gauge the move by looking for confirmation of trends with them.
| Spot Gold 3 Year Chart vs. Aud-Usd Chart |
Data Source; MetaTrader4 and Bloomberg
If we cast our minds back to 1980 and think what we could have bought with $900 it would make you smile; big car deposit, part of a mortgage down payment, a month’s salary for most, oh yes, and an ounce of Gold. Gold has hit $1000 an ounce and questions are being asked as to whether it can now make a move from 'overbought' conditions. Overbought? Not if we think about what $1000 buys today; one months payment for the two cars on credit, 2/3’s of the average monthly Mortgage payment, a weeks salary for most, oh yes, and an ounce of Gold. Maybe now $1000 does not seem so expensive. Overbought? Not yet, in 1980 valuations it would equate to nearly $1,900 an ounce, or another $1100 from where it is right now.
If it is not overbought then there could be plenty of room to run. Gold has appreciated on the US$ valuations by 60% since 2001, and that is a lot of ground to make up for any central banks that are not holding Gold Reserves, or those who deviated from the standard of $1 per paper note is backed by $1’s worth of Gold. The Federal Reserve comes to mind, and their Fractional Banking policy, where $1 of note value printed only has to be backed with 10c of Gold, or equivalent.
Gold, either bullion that is deliverable or gold backed paper, is deemed to be a relatively a safe investment. It is a hard asset that is also seen as a hedge against inflation. In times of economic turmoil, gold prices tend to increase as markets shift from riskier assets such as equities and move to the relative safety of gold, which tends to return a better percentage than bonds at the initial switch. Conversely, in times of economic prosperity traders will move their money to more riskier assets such as equities looking for potentially higher returns. As a hedge against inflation, gold is used by traders to protect themselves against the Federal Reserve moving interest rates. If signs persist of growing inflation traders will buy gold to offset the possible future decline in equity markets.
Gold is traded on the Chicago Board of Trade (CBOT).
The Australian Dollar is the currency that is most impacted by the price of gold. It displays an amazing correlation to the direction of gold prices when viewed on yearly charts. Australia is one of the world's largest producers of precious metals and has huge natural reserves. As the price of the yellow metal increases so does the aussie in general. If the price of gold falls there is generally a negative impact on the Australian Dollar. As a global commodity gold is priced internationally in U.S. dollars, and as such buying gold automatically creates a short U.S. dollar position.