What
Happens to Currencies If Gold Goes to $500? - Forex
Market
Friday, 03
June 2005 GMT - Source FXCM
If Gold were to reach to $500/oz,
the global economy would most likely find itself in
the midst of either a serious geo-political conflict,
or face the prospect of runaway inflation. In fact,
during the last Gold Bull market, precipitated by the
Iran hostage crisis, both factors played a major role
in Gold's rise from $300 oz. to $800 oz.
In foreign exchange, no major currency is considered
to be as safe and stable as the Swiss Franc. The country's
centuries long policy of political neutrality as well
as the fact that 40% of its currency reserves were previously
backed by the precious metal, contribute to Swissie's
image as “liquid gold”. Note how the Franc's
rise last year correlates almost perfectly with the
rally in gold. The Franc would
not be the only beneficiary of the bull market in
Gold. Both Canada and Australia possess large reserves
of precious metal and both countries have very strong,
well-developed mining sectors. Australia is the world's
third largest exporter of gold with mining accounting
directly for approximately 8.5% of its GDP.
Canada is the world's third largest producer of gold.
In 2004, Canadian production expanded by a whopping
21% from 131 metric tones to 171 metric tones per
year. If gold maintains its uptrend in 2005, the Swiss
Franc, the Australian Dollar, and the Canadian Dollar
should follow its lead. At present, the two commodity
currencies also offer the advantages of positive carry
trade, with AUD generating spread of 300bp (5.25%-2.25%),
and CAD of 25bp (2.50%-2.25%) against USD.
|
