What’s Driving Gold Prices?

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There are no set rules in the capital markets. For example, normally we expect gold prices to move inverse to the dollar and to be correlated with currencies like the Australian dollar. There are a lot of trading strategies built around these “normal” relationships. However, that is not what is happening to gold right now. What is wrong and what can traders do about it?

[VIDEO] What’s Driving Gold Prices?

There are many factors that affect the supply and demand for gold. It is a shelter against inflation and will typically rise in prices when the USD is inflating or falling in value compared to other major currencies. Like most commodities it can also rise in price during economic expansions and will often decline during contractions with other commodity prices.

However, gold is also a hedge against uncertainty. It is what is often called a “store of value.” Assets that qualify as a store of value include a few commodities and some currencies, particularly the USD. Store of value assets will rise in value as demand picks up during economic crises. That is the situation the world is dealing with right now.

Both the US dollar and gold are widely recognized and utilized “store of value” assets and as uncertainty increases in 2009 the value of the USD is likely to continue increasing in tandem with gold. This means that traditional analysis might be much more unreliable than expected.

A perfect example of a disrupted relationship in this situation is the AUD/USD. Many traders may be expecting higher prices in gold to lead to a rising trend in the currency pair. However, risk may in fact be biased to the downside. The trend in gold is fear driven and is therefore inherently fragile. A collapse in gold prices, should the stimulus prove to be effective in the short term, could hurt the AUD/USD.