What a Rising Aussie Dollar Means for Gold Investors

The recent rise in the value of the Australian dollar is making gold investments more attractive to investors. That’s because gold is traded in US dollars. Anytime the US dollar drops, it makes gold cheaper for holders of non-US currencies.

The Aussie dollar is trading just below $0.80 against the greenback. The USD has fallen  recently on the back of disappointing employment and retail data in April.

That’s led to the rise in the value of AUD. It’s roughly $0.05 stronger against the USD than it was in March. As a result, gold has become more affordable for Australian investors. While five cents may not sound like much, it stems the yearlong trend of resilient USD strength. Roughly speaking, Aussie investors can buy gold for $61 cheaper per ounce now than they could in March.

Gold prices have rebounded strongly since October last year. The precious metal was trading at US$1,230 as of May 18. That’s almost US$73 higher than in October. And prices have risen for five consecutive days now, bringing them to a three month high. The past 12 months have seen gold trading up by 4%.

On the one hand, a weaker US dollar is making gold a cheaper investment. But on the other hand, gold demand is rising around the world as the US dollar falls. That’s pushing up gold prices, which may offset some of the benefits gained by the AUD’s recent gains against the greenback. In light of this, you probably want to know what the rest of 2015 might hold for gold prices.

Where could gold prices go next?

The relationship between gold and the USD means that the currency will retain the strongest influence on gold looking ahead. In other words, the US Fed will dictate where gold prices go. If they lift rates — as some predict they will in September — that would send the USD higher. And it would likely drive gold prices down lower.

That’s partly why some economists question whether gold has a limit to its potential this year. The argument goes as follows. If the USD is the main factor affecting gold prices, it might not result in a change to investor sentiment. In other words, without increased market demand, gold prices won’t rise much higher this year. And if the market doesn’t see gold appreciating much higher, then it’s likely to hold off on buying.

But metals prospector Golden Arrow says that gold could reach much higher in the next three years. They think the market has low long term expectations about the US dollar.

Golden Arrow suggest that gold is the go-to asset to buy when the world’s reserve currency (the USD) starts tanking. Their belief is that the USD will lose steam as the reserve currency over the next few years. If it does, then investors will flock to metals like gold for safety. That would make much cheaper for Aussie investors. But it would also result in skyrocketing gold prices.

Mat Spasic,
Contributor, Markets and Money

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PS: While gold has risen steadily since February, the stock market has gone the other way. The ASX lost $7 billion in value between February and March. Investors have been wondering whether the bubble is starting to burst.

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