Thursday, September 20, 2007

Gold Rush!

Have you noticed how gold prices have been moving this month? The chart on the left comes from, my favorite web source for gold pricing. Gold responds to weakness in the dollar, and man has the dollar been getting weaker lately. (Aside: when people say the dollar is "getting weaker," they are talking about foreign exchange rates. A weaker dollar means it takes more dollars to buy one unit of another currency, such as the Canadian dollar or the Euro). This weakness sent the price of gold up from $670 an ounce on Sept 3 to about $740 an ounce today.
When I was a kid, we would always make fun of someone who got a Canadian dime as change from the store because, as the joke went, Canadian money was basically worthless as compared to American money.

Well, not anymore. Here's a five year chart (courtesy of yahoo finance) showing how many Canadian dollars you could buy with one American dollar. As you can see, as of today, the US Dollar and the Canadian dollar are basically at parity, meaning one US Dollar is worth as much as one Canadian dollar.

So... is this bad news? My answer is "I don't know." Even with all of my education and having read as much as I can on the topic, I still don't know if the current decline is such a bad thing. It's not like I'm buying groceries priced in Euros. I live within the dollar system. I'm paid in dollars and I buy things for dollars, and I haven't noticed much of an impact from this on my daily life.

For the broader economy, a weaker dollar makes American goods look more attractive to foreign buyers because now a Canadian can spend fewer Canadian dollars to buy a pair of American shoes than he spent last month. The American company didn't change the price of the shoes, but the exchange rate turned in the buyer's favor. This should in theory help our exporters be more competitive in global markets and help to reduce our nation's massive trade imbalance. However, if it persists in the long run, I think it is bad news. If the US is competing in the global economy only because our prices are low, our companies won't have as much incentive to innovate and create fantastic products and services. The reduction in competition will reduce our need to increase productivity, and American industry will get fat and bloated.
I'm not running for the hills, but the situation does not look very good.
If you're interested on reading more about the dollar's weakness, the big buzz on wall street today was the story about Saudi Arabia potentially ending its peg to the US Dollar. This was one of the main catalysts for what we saw happening in the currency and metals markets today.

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