Gold and Economy

Gold is priced internationally in Dollar terms. The price of gold and US dollar is inversely related. When US dollar depreciates i.e. when investors are loosing faith in the US dollar, they start bidding up the price of gold. Conversely, when the world views the dollar as stable currency, the price of gold does not go anywhere.

Since the start of financial crisis, The Federal Reserve (Fed), the central bank of United States, has been printing dollars up to make the economy running again. The idea is that with more money in the system, Banks will lend more. The increased lending will help people to buy more which in turn will benefit companies and thus generate more employment and hence more consumption. What is perfect theoretically has not really worked out primarily because banks have not been lending. This causes availability of dollar in excess and looses value in respect of other currencies. This in turn causes other currencies appreciates as in the case of Indian currency in past two years.

An appreciating currency hits exports and exporters, since they make losses. This causes other currencies to print money to make parity so that they don’t loss export. To tide over the fiscal deficit, Japan has also started printing money. As the dollar depreciates, the prices of Gold and silver increases. In this economic environment, there is one currency which is of immense intrinsic value and is also limited in supply and that is gold.