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Riding high: Dollar, gold hit new heights

The Australian dollar and gold prices show no sign of deflating, after both hit six-month highs over the weekend.

Gold is traditionally seen as a hedge against inflation (or economic stimulus) by investors, so the price tends to move higher, as inflation rises, or when central banks unleash ‘economic easing’, which tends to devalue their local currency. Investors traditionally buy gold when they are worried about inflation. Inflation erodes the buying power of your money, but some consider gold ‘inflation-proof’, making it attractive when inflation is on the rise.

The three rounds of ‘quantitative easing’ in the United States are considered by many to be likely to drive inflation higher, which may explain investors fondness for gold, and the record price.

These same inflationary impacts also make other currencies more attractive by comparison, which is partly behind the strong Australian dollar.

Both gold prices and the Aussie dollar rose after the US Federal Reserve recently announced plans to keep buying bonds to stimulate the US economy and until the US employment rate falls markedly.

Gold is currently trading around US$1,775 per ounce, while the Australian dollar is buying around US 105.3 cents.

Many Australian gold miners have seen their share prices tumble in the last six months by much more than the falls in the gold price. Newcrest Mining (ASX: NCM) shares hit a 52 week high of over $36 back in February this year, before slumping to a low of just under $21 in July. Since then, the shares have recovered, and are currently trading around $29. Likewise Alacer Gold Corp (AQG), OceanaGold Corporation (ASX: OGC) and Resolute Mining (ASX: RSG) were all down around 24% to mid-July, but have since recovered somewhat.

Gold is seen by many as a currency rather than a commodity, and is only used in small quantities for industrial purposes, so it tends to follow different cycles to other commodities like copper or nickel.

With the gold price at current levels, this may be an opportunity for investors to pick up some cheaper Australian gold stocks. A fall in the Australian dollar versus the greenback would be a bonus for miners and their investors alike– as that would increase the amount of Australian dollars they get for selling gold in US dollars.

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Motley Fool writer/analyst Mike King doesn’t own shares in any company mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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