Gold rates reached a new all time record high of $914 in early January, easily surpassing the previous high of $850 (set in 1980) since the gold-dollar rate was first floated in 1971. Prior to the market adjustment following the float, gold traded at a fixed rate of $35 per ounce. A major factor in the gold rise is the continued deterioration of the dollar value. In fact, gold has held somewhat steady against other major currencies during the strong surge against the dollar. Along with gold, the dollar is also sitting just below its weakest point against the Euro. Additionally, a dollar is just over half the value of a Pound.
Many speculators are driving gold higher in hopes of finding safety position against a weaker dollar or a potential collapse. Many countries in the global community are leery of a significant drop in the dollar as well, as much of the world relies on a strong dollar for global economic health. In fact, many countries hold a high proportion of dollars in their reserve portfolios, which are used to maintain financial security during weak economic times, and to protect against currency fluctuations in their home markets.
Australia, South Africa, and other countries that are strong producers of gold are benefiting from its increased value against the dollar. They are able to leverage their strong resources against weaker currencies. The United States has long maintained nearly a 70% proportion of reserves in gold, which gives peace of mind to many that a dramatic dollar move will not ruin the economy.
Gold is an interesting natural resource in that it is a rare material that sees changes in value largely driven by speculation. Most natural resources are valued more for their use in manufacturing, production, or jewelry. Gold, however, derives much of its value from speculation driven by its stability as a universally accepted monetary unit. Currencies are often at risk for unhealthy price appreciation or deprecation during certain economic conditions. Gold has maintained its position as a valued resource based simply on its viability as a financial holding reserve.
As the dollar gets weaker, some economists believe there is still more room for the greenback to fall, given struggles in housing and mortgage, slumping retail sales, and a generally uncertain economy. A weak dollar might not necessarily present immediate and direct impact to Americans, but a weak currency ultimately affords people less bang for their buck in the marketplace. Additionally, Americans looking to travel to countries with stronger currencies often cannot afford the huge costs associated with buying higher rate currencies with weak dollars.
On the contrary, foreigners looking to leverage their stronger currencies can find cheap buys in low currency valued markets. Strong currencies can buy more US based goods since they are leveraged against a market of a weakened currency. Many strong currency investors look to foreign investment to take advantage of low cost options. Some individuals from Europe and other stronger currency markets also are looking to the US to get cheap second home buys, or vacations.
Based on history, some are waiting for the gold-dollar direction to change. However, many gold bulls say the current gold rise is an overdue inflation adjustment similar to the surge in gasoline prices in the states. They say gold should be around $2100 if inflation is taken into account against historical prices. On top of that, current interest in gold as a safe money bit indicates potential for an even higher move. Conversely, the dollar is still at risk. Housing and mortgage data remain weak and fourth quarter US retail sales have been poor. The dollar is not safe for the time being.