When we compare the Price of gold to the price of the two other commodities or the old Dow Jones index the value of the dollar becomes a non issue. It is a simple math exercise, when we look at the price of the Dow , Silver & Oil, we actually look at:
Dow (1 index unit) / USD(1 ? unit ), Silver(1 oz unit) / USD (1 ? unit) & Oil (1 Barrel unit) / USD (1 ? unit).
So if we divide Dow with Gold , Gold with Silver or Oil we can simply ignore the denominator (the USD in this case) according to simple algebra (fraction division law), here is an example :
(A/B)/(C/D) = (A/B)*(D/C) = AD/BC
Likewise:
[Dow (1 index unit) / USD (1 ? unit)] / [Gold(1 oz unit) / USD (1 ? unit)] =
[Dow (1 index unit) / USD (1 ? unit)] * [USD (1 ? unit) / Gold(1 oz unit)] =
[Dow (1 index unit) * USD (1 ? unit)] / [USD (1 ? unit) * Gold(1 oz unit)] =
Dow (1 index unit) / Gold(1 oz unit) =>
This ratio is not directly dependent on the USD (or any other currency)
As you notice each of the objects is measured by a constant measurement unit: Gold and Silver are measured in troy ounce or other weight unit , crude oil is usually measured in barrels or other volume unit, The Dow Jones is measured with index unit. Currencies like the US dollar also pretend to be a basic measure unit , but unlike troy ounce, barrel or any other physical measurement unit currencies are non constant and not stable.
4 comments:
One question.
Gold price is closely correlated to USD strength.
If USD falls by 30% (due to the trade account deficit), is it wise for non-US citizens to buy the GLD ETF as it is priced in USD?
Even if gold goes up by 30% in USD, it is off-set by the loss in forex exchange (ie. USD vs other currency).
Instead of GLD, are there any gold ETFs in Europe or other countries whose currency will likely strengthen if USD falls?
Gold is also a currency, it's going up against all currencies and will continue to do so in my opinion.
Please see the charts and info here: http://globalgold.blogspot.com/2006_03_26_globalgold_archive.html
For gold etfs see : http://www.exchangetradedgold.com/
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Great review as always ,thanks for sharing information keep it up.
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