Gold Price Divergence

The Dollar price of gold has been making headlines, but the real move has yet to come...

WHILE GOLD'S RISE versus the US Dollar – though not spectacular at around 10% over the last 18 months – has been making headlines, it has barely moved in many currencies, notes Julian Phillips at GoldForecaster.com.

In South Africa, one of the leading Gold Mining producers, the Rand price of gold has hardly moved, leaving gold investors to steadily build up their holdings. Over the last 18 months, the Rand has strengthened from a low point of around ten to the Dollar to 7.4 per Dollar, sucking out all the benefits of a Dollar rise in the Gold Price.

In India, a major gold buyer, the Rupee has risen from around 48 to the Dollar to the current 46.55, a rise of 3%, in the last month alone. This has left some gain in the Gold Price, but not enough to deter festival buyers who now accept the Gold Price will stay above the level of Rs.15000 per 10 grams.

The high price itself is cutting the size of wedding and post-harvest festival purchases, but this is a trend that has occurred all the way up the rise in the Gold Price. Indian buyers do not have the same mindset as Western buyers. They are not focused on the state of the world's money systems, only on the Rupee price of gold and their own financial security. To them gold is better than the Rupee.

In Europe, and in the time it has taken the Gold Price to rise from $985 to $1056 an ounce – a rise of 7.2% – the Dollar has fallen against the Euro by 6.8%. That has left the Euro price of gold higher, but not significantly.

When will the Gold Price rise in all currencies? For gold to really show its mettle this autumn, it does have to rise in all currencies. But were that to happen, it would signify a horrifying state of affairs in the monetary arena. Long before then, the market will – as it is doing now – discount that future time. In centers where the Gold Price is not rising in the local currency, investors are fully aware that if the Dollar falls into decay, it will not be too long until even the strong currencies will follow.

The only time when this will not happen is if another economic bloc can drive the global economy to the extent the US economy has done since the Second World War. That may well be a decade away, and not before Chinese is taught as a second language in most countries. The time ahead will continue to be one of uncertainty and fear. This will continue to drive investors in strong currency countries into gold, hopefully, while that currency remains strong.

Beware the tendency to want to be able to measure accurately the Gold Price against another item, such as the Dollar. Uncertainty and fear are often immeasurable emotions. Perspicacious investors look ahead and buy accordingly. That's where we are now. The Dollar's fall is symptomatic of a decay in the entire monetary system, not just the United States. The tensions that the fall of the Dollar will produce will impact on other nation's Balance of Payments and on a wide range of industries. We've seen it already. But this will not be all.

These problems will spread to the political front and where international cooperation is needed, national interests will clash in the monetary system. History tells us that a shift of power, military or economic, always leads to the heaviest of confrontations. Sadly, the monetary system could well be the battleground.

Gold will discount that future before it happens, as always. The price will not be the accurate measure of that, but the acquisition of gold – and who buys it – will be. At the moment the build up of gold reserves by China and Russia is the most significant of gold market actions we have seen for many years.

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