If your trade or business decisions involve the Australian dollar, you might want to pay attention to the gold market. Circumstances are developing there that could have a significant influence on the Australian currency.
Of course, one of the biggest factors in international business is the relative value of various currencies. If there are significant differentials between economies or the value of their money, it is crucial to be aware of those differences and cash in on them by making the right purchases at the right time.
The circumstance that most influences the Australian dollar (AUD) is the quickly rising value of gold. The “gold boom” as it has been called, is probably the result of a jittery market. It is an old story in forex trading for investors to flee to gold and commodities in times when major world currencies are insecure. The European crisis in Greece has investors wondering about the long-term viability of the euro. Naturally, a failure in the euro would also bring significant economic adjustments for the dollar as well, and this is what has investors so worried. A final factor is important, but not often mentioned—only two years ago, the US suffered the second worst financial disruption in its history that sparked one of the worst world financial crises of the last century. The market still remembers what happened and is certainly inclined to measure more recent events in that light. This proximity also means that most governments have already given vast sums to spur their economies, and there will be an inherent challenge for them to do so again.
All of this boils down to fear, and gold has been one of the most common ways that the market has responded when scared. Because of the vast amounts of liquidity that were injected in the last two years, world markets also expect a coming period of high inflation, and gold is a classic hedge for inflation.
So how does this relate to Australia? As the fourth largest producer of gold and a huge exporter, Australia is always influenced by gold prices. The gold boom has also extended to most other precious metals and major commodities. This class of assets forms the core of Australia’s economy—in fact, the Australian dollar is commonly considered a commodity currency, since Australia is so heavily dependent on mining. As commodity prices rise and fall, AUD has historically followed their adjustments.
The simple principle, therefore, is to expect AUD to roughly follow the gold boom. As long as the price of gold and other commodities stays high, the Australian dollar will also stay high relative to other currencies. If there is an extended period of high inflation worldwide, AUD may be a conspicuous exception. If investors flee to gold to escape inflation, AUD would naturally rise along with commodity prices.
On the other hand, expect the gold boom to experience a correction in the near future. It seems that prices are simply too elevated in the present, and when the market comes to terms with some of its fears, some of this hype will be squeezed out. Still, future inflation would chase gold prices back up and could even cause them to surpass the present gold boom. In other words, expect this to be a long term trend with long term implications for the Australian economy. This might even be a good time to open a forex demo accountto take advantage of the differential.
One final qualification is in order. As with all questions in forex, this dynamic is only factor out of many. Other events in Australia or actions by the Australian government could counterbalance or even overwhelm this trend. The point is that this is a real factor that will make a difference, and anyone who conducts significant business operations that involve the Australian dollar should be aware of it.
