NEW YORK (Commodity Online): If the investors are rushing to gold, then blame it on the dollar. That is the advice given by several analysts as they feel that the weakness of the dollar and a fear of inflation in the US are the main reasons forcing investors to go for gold.
In fact, gold’s latest record-setting rally has little to do with gold and everything to do with the US dollar. The price of gold leapt to a record, leading a sharp rally in commodity prices. Gold climbed to $1,060 a troy ounce, its third record in as many days.
Market analysts said behind this rally is not so much bullishness about commodities demand, although those confident of a global economic recovery reason that commodities will rise apace.
The main reason for the latest flight to commodities is concern among investors that soaring US government deficits are undermining the dollar and that they should seek shelters from inflation.
The dollar has been steadily declining this year amid concerns that efforts in Washington to stimulate the US economy by pushing interest rates to nearly zero and spending newly minted dollars are undermining the greenback’s value. The dollar fell to a two-week low against the euro on Thursday. The US Dollar Index, which tracks the dollar against the euro and a trade-weighted blend of other major currencies, has fallen to its lowest since August of last year.
The decline of the dollar has intensified a debate over how long it can or should remain the world’s dominant currency of trade. Gold, oil and most internationally traded items are priced mainly in dollars and so exporters such as China and the UAE accumulate US dollar reserves as a by-product of their massive trade surpluses. A weakening dollar reduces the buying power of these reserves, which are typically invested in the US and US dollar-denominated securities.
For investors, the prospect of inflation is an argument for buying commodities and stocks anywhere and everywhere. And with signs increasing that Asia and other emerging markets are leading a global upturn, many investors are taking the advice of strategists who say that investing in emerging markets and commodities is a no-brainer.
To some extent, there is real demand behind gold’s 16 per cent rally this year. Purchases of gold jewellery – primarily in India, one of the largest markets for gold – have been rising in recent months. Indian imports rose by 8 per cent in July compared with the same month last year.
Most of the demand for gold, analysts say, is coming from exchange-trade gold funds, such as the ETFS Physical Swiss Gold Shares, which started trading on the New York Stock Exchange last month.
Some economists warn that there may be something more ominous than inflation behind gold’s rise. Typically, investors fearful of inflation buy commodities and sell bonds, whose yields are eroded by inflation.
