Over the weeks, we have seen the gold rising in price while the US Dollar drops.
So what is the current situation now. Why is the gold rising?
1) The US dollar is weakening. The US Dollar index, an index placing the US Dollar against a basket of other currencies, has fallen from it’s height of almost 90 last year to the current 70s.
The bad unemployment conditions in the US may be contributing to this as investors speculate that the US is still not out of trouble yet.
2) While the equities have rallied quite a bit so far, conservative investors believes that this is simply a temporary bubble, posed to pop anytime soon. Buying into gold now is an early defensive move for them. Note that how they are doing so without seemingly buying any more US Dollar as a safe haven?
3) Did you read about the report of the Indian Central Bank buying gold from the IMF? That did push the gold price up. When central banks buy gold, they have a reason for doing so. Investors may note that and speculate that it is a move to diversify away from US Dollars.
4) Speculation moves price. The gold has been in a bullish mode for sometime now and every day new folks are hopping on for a ride. Speculations of further dollar weakness, equities crashing again, unemployment rates getting worse, you name it, you probably get it. These probably makes the gold price rise and fuel a fresh round of speculations that the US Dollar is getting weaker since gold has risen.
By doing this analysis, we may have a possible conclusion. Gold seems to be telling us that the US Dollar is indeed falling out of favor from the investors down the street right up to the central banks. Another possibility is that there is growing consensus that the global economy is not quite out of trouble yet and investors are preparing for the eventual storm.
Do note that the gold price may develop bubbles as well and hence one should not go jumping into gold just because everyone is doing so! Do your home work and analysis.
Hope this article sheds some light on why gold is rising and on a bigger outlook why the US Dollar is falling.
If you want to understand the role of gold in the global economy, view my forex education article on gold.
( Report is courtesy of Mulder. Yes he has contacted me and he thanks all readers who are concerned. If you do not know what the heck am i talking about, follow my daily EUR/USD reviews 🙂 )