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Gold vs The Dollar by Jordan at Investing Blog

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We live in interesting times. We have a FED chairman who is now practically underwriting the stock market, gold is trading in the $1300s, and silver is flirting with $30 per ounce. While railing against the dollar has been fun, and exceptionally profitable, investors should have taken a reminder yesterday that metals aren’t all about the greenback.

Gold Bullion’s Purpose

Bullion has a purpose, a utility it has showcased for centuries: its usefulness as a currency. Today, people are flocking to gold and silver because they are, at the very basis, a global currency.

But somewhere along the line we as a group of investors started subscribing to the idea that gold bullion is an effective short on the dollar; that when the dollar goes weak, bullion should rise. I still stand by what I said last year when I said that gold would never again fall below $1000 per ounce.

However, it has to be clear that this isn’t just about the price of gold vs. dollar. It’s about the price of gold vs. currency, rather, the supply of gold vs. the supply of global currencies.

World Wide Action

Just yesterday, China announced that it would again increase its bank reserve ratios in an attempt to stave off inflation.

China contends that it’s being infected with “hot money” or speculative dollars that rush into a certain industry, country or business as the result of easy credit and inexpensive investment capital. Capital around the world is cheap, it’s practically free at the FED and even the US Government so many worry about is borrowing at less than 4% for 10 years.

So, naturally, money is flowing into China. With the Chinese currency still undervalued, and the economy slated to grow 10% in 2011 while other countries fight just to stay above par. Is it any wonder why people want to move devaluing dollars into China? You have the opportunity to bet on a rising currency in a country that is growing by 10% per year. That’s a racket!

The subject at hand, though, isn’t China. It’s gold vs. the dollar. Notice, that when the Chinese central bank decided that it would, in contrast to other countries, begin tightening to fight inflation, gold tanked. Nevermind that this follows just two weeks after Bernanke decided to pump an additional $600 Billion into bank reserves in the United States.

The take home from this article, if there is any, is that gold is not to be confused as a dollar short. It’s a global currency short. I fear that with gold attracting headlines every week in the WSJ as it makes new highs that speculative anti-dollar investment will pile in. While the dollar matters, austerity in Europe, tightening in Asia, and growth in the emerging markets is at least temporarily diluting any future upside in gold from a perspective of gold vs. dollar.

If you really want to be anti-dollar, you might want to look to China, a country that sucks more dollars out of the US than any other and with a currency still shaking off its weak peg to the USD. Gold as a dollar short just isn’t as sexy at $1350 per ounce.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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