Gold and AUD/USD Falling – Why?
Recently we’ve seen both the price of gold and the AUD/USD currency pair falling. Why is this? Read this article to find out a possible reason.
The AUD/USD currency pair is a resource driven currency. Australia’s economy is basically driven by exports of iron ore, nickel, gas, coal and agricultural commodities. Until recently the price of these commodities have been at historic highs. To some extent this has been driven by massive demand for resources from China, while speculators have also purchased these commodities as hedges against inflation.
A direct way of benefiting from this has been to buy Australian dollars. This pushed the Australian dollar to around 98 cents.
In an environment that is heading towards recession, there will no longer be the same demand from China, or inflationary pressures. This means less demand for commodities, which means less demand for the Australian dollar, which equates to a falling Australian dollar. The current strength of the US dollar makes this even more pronounced.
The demand for gold comes from two areas – jewellery and speculation. Similar to commodities, gold is seen as a hedge against inflation by speculators. However in a recessionary environment, inflation is not seen to be a problem. This means less demand for gold (since it is less likely to rise in price) and therefore lower gold prices.
Smart traders will benefit from these macro-trends by taking long term positions. Whilst gold will always have some value (particularly since it is likely that US political actions will result in inflation), the current trend is still down. Similarly, the trend for the Australian dollar is down, so I see selling at around the 70 cent mark (when it rebounds) while the outlook for commodity prices is grim.
