Oil and retail gas prices set new records again today (May 8). Oil futures climbed over $124 per barrel in New York trade, while the national retail price index showed an average of $3.65 per gallon. The latest surged in oil and gas have coincided with the recent modest slide in the dollar. Contrary to oil’s ability to continue upward in price in spite of the gradual return of the dollar over the last month, gold has seen a strong dip during the same period.

Gold cracked $1,000 during March at the same time the dollar was reaching bottom. The dollar had dipped to 97 yen, the Euro pierced $160, and many other world currencies were reaching highs relative to the dollar. The dollar currently sits just below 104 yen, it has pushed the Euro back to around $1.54, and it is well off its lows against most of the other major currencies. During the last month in which the dollar has been firm, gold has retreated from its huge spike during the dollar fall.

Gold speculation grew while the dollar struggled because gold is viewed by many investors as the safe money investment. As gold is a major reserve holding for most of the major global economic powers, its speculation rises when investors believe the country’s currency is in trouble. As speculators watched the momentum of the dollar continue downward, they bought gold profusely.

In the last month, many analysts have started to wonder if the dollar has reached bottom and is building off its base. As the dollar sits several pips above lows against most currencies, economic conditions in the US appear poised for improvement. Earnings have been stronger than expected for many companies during the first quarter. Some experts have suggested the credit crisis may be starting to fade. Tax rebates are being distributed and the potential for second half improvement has strengthened the greenback. This potential and market sentiment has pushed gold speculation back.

The current spot rate for gold is just above $881 per ounce. This is nearly $140 per ounce off the high of late March. It will be interesting to see how the gold and dollar relationship evolves. If it is true that the dollar has reached bottom and is on the ascent, the general inverse relationship of gold and the dollar would suggest gold prices are ready to retreat farther. Some analysts have called for a super spike in gold over the next few years. Goldmoney.com founder James Turk has suggested a price of $8,000-$10,000 per ounce is in the realm of possibility for gold by 2013. Turk and other similar forecasters have also predicted a much greater fall for the dollar, however.

The movement of gold does not necessarily impact Americans hugely in their day to day lives. Gold is used as a resource for some manufacturing and product development processes. It is obviously a commodity common to various jewelry items. However, the price of gold is more of a relative indicator of economic conditions that do affect Americans. Gold is a rare natural resource in that its primary value is derived from speculators and as a holding reserve. Most world Central Banks rely on gold reserves to stabilize their currencies. The US has floated the dollar against gold since 1971.

If gold prices are on the rise, it is likely because of a falling dollar and uncertain economic conditions. Speculators are looking for a safe investment. If gold prices are falling, speculators are likely looking for more growth oriented, or aggressive investments. This is generally indicative of a more stable economy that gives investors a sense of comfort.

Market Recap

Stocks dropped sharply Wednesday, mostly due to continued rises in oil prices. The Dow dropped 206 points on the day, while the NASDAQ and S&P were down 44 and 25. Oil jumped over $124. Worker productivity was up during the first quarter. Consumer borrowing rose in March and Treasury Secretary Henry Paulson said the credit crisis may be starting to fade. Stocks were up moderately Thursday even while oil and gas once again reached new records. The Dow rose 52 points to close at 12,866. The NASDAQ and S&P were up 12 and 5.

Neil Kokemuller
Thursday, May 8, 2008
11:10 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 informational 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.