Gold has been on the rise in recent days and weeks, as the dollar has softened. Similar to oil, gold is a commodity that tends to move inversely with the dollar during uncertain economic times. Earlier in 2008, the gold spot rate soared to a record near $1,020 per ounce, its highest point since the dollar’s value was floated against the natural resource.

The gold spike months ago developed in synch with the greenback’s plummet to historic lows against most major currencies, including the yen, Euro, British Pound, Swiss Franc, and more. Since its high point, the gold spot rate had settled back and forth of $900 per ounce for some time. It dropped just above $850 briefly before its recent steady rise.

Gold, similar to oil, rises when the dollar falls because it is not a commodity that is efficiently developed and maintained in the US. The US does dedicate a large percentage of its financial reserves to gold. However, the nation’s ability to naturally produce and develop the resource is very limited. This is why the dollar typically moves opposite to gold in price during uncertain economies.

Gold is a unique natural resource in that its value is driven mostly by speculation and its value as a financial holding. Most other natural resources have their values affected by the demand for the resource in production or manufacturing use. Gold is held in large amounts as a reserve financial holding by most of the world’s major economic powers. For this reason, speculators tend to drive up the value of gold as a safe money investment when the dollar is weak. In the same vein, currencies from countries that have strong gold development capabilities tend to increase in value when gold rises.

The dollar held steady against most major currencies for most of the second quarter of 2008. This kept gold in a relatively narrow trading pattern on the plus or minus side of $900. However, the dollar has recently dropped sharply against most currencies, particularly Asian and European currencies. This dollar drop has been contributed much to inflation and economic concerns as well as rising oil prices, which make the dollar weaker. This dollar fall has helped push gold back up strongly over $900 to a current spot rate around $935.

To the typical American, the gold rate is not necessarily as concerning as oil and gas prices, especially with recent conditions. However, the gold rate is often more of an emotional barometer about the financial stability of domestic and global economies. When gold is rising firmly, there is usually concern in the minds of speculators. When gold gradually declines, it is an indication that speculators are moving into more risky, aggressive investments based on confidence in the stability of their investments. Gold is widely recognized as the most trusted form of monetary savings. Thus, a jump in gold value, similar to the current rise, suggests speculators believe it is better to be safe with gold, than sorry with the dollar or another form of investment.

No one knows for sure where gold is headed. As with most other major financial markets, much will be learned during the second half of 2008. The US economy has much to do with the development of gold. James Turk, leading gold analyst and founder of GoldMoney.com has previously predicted gold could rise to $8,000-10,000 per ounce by 2012-13. This seems hard to fathom at the current rate. His estimate includes some gains based on gold catching up to inflation from the last twenty years. However, it seems hard to imagine the dollar would drop as much as seems required to see gold hit that mark in a few years.

Market Recap

The Dow dropped 166 points on Wednesday as the NASDAQ and S&P were hammered down 53 and 23 points. Oil climbed past $144 as the dollar softened further. Stocks rebounded Thursday driven mostly by a jobs report that came in as expected, a positive boost for the economic picture despite a sixth straight month of lost jobs. The Dow gained 73 points, the NASDAQ dropped 6, and the S&P picked up one point. The dollar rebounded against many major currencies.

Neil Kokemuller
Thursday, July 3, 2008
11:43 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for information and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.