Gold and the US Dollar Exchange Rate

dasim

I'm considering putting some money into gold. I'm aware of many of the pitfalls but I can't get my head round what happens to the sterling price if the US Dollar collapses which I think is a risk.
Currently the gold price is quoted as USD937 or £680 per ounce and the exchange rate is about $1.38/£. Excluding all other factors what happens to the sterling price if the dollar falls to say $2/£? Does the sterling value of an ounce just drop to say £468 (i.e 937/2) or would the dollar price of gold rise to compensate for the devaluation?

I haven't been able to find any sites which show a correlation between exchange rates and the gold price in dollars.

Has anyone any comments please.

purch

The Gold price will benefit more from a fall in value of the USD than any other currency.

This will mitigate some of the drop in the GBP price of Gold caused by a move to $2.00 but not all of it.

tradetime

You've pretty much got it, if the USD$ were to crash, all other things being equal the price of gold in dollars would rise. Be aware that it is popularly believed that the IMF is planning to sell a lot of gold, as one of the largest gold holders, if that happens it will likely drive down the price of gold.

dasim

Thanks tradetime and purch. I guess that basically I would not only risk downsides from the fluctuations in the dollar gold price but also by not necessarily covering a loss from the USD/£ exchange fluctuation. The latter presumably being because the actual price adjustment would be based on the dollar trade weighted index rather than just against sterling.

I've spent the past few days agonising over this one. Think I'm going to agonise some more!

Lol_UK_2

tradetime wrote: »

You've pretty much got it, if the USD$ were to crash, all other things being equal the price of gold in dollars would rise. Be aware that it is popularly believed that the IMF is planning to sell a lot of gold, as one of the largest gold holders, if that happens it will likely drive down the price of gold.

There are restrictions on how much the IMF can offload...so that it won't 'disrupt' the market:
http://www.imf.org/external/np/exr/faq/goldfaqs.htm#q4

...and it will probably be snapped up by China (seeing as noone else has any money to spend!)..or it might just fill the hole left by Comex defaulting on all the gold it has oversold...
Devaluation of currencies and resulting inflation should do well for the gold price

tradetime

Lol_UK wrote: »

There are restrictions on how much the IMF can offload...so that it won't 'disrupt' the market:
http://www.imf.org/external/np/exr/faq/goldfaqs.htm#q4

...and it will probably be snapped up by China (seeing as noone else has any money to spend!)..or it might just fill the hole left by Comex defaulting on all the gold it has oversold...
Devaluation of currencies and resulting inflation should do well for the gold price

Yes that looks very pretty, makes for a good read, what you should consider is that gold is not special, in so much as no-one wants a disorderly or "disrupted" market, whatever that market is, but needs dictate events and what people would normally like rarely gets in the way, you don't have to go back in history too far to see that, just look back to the peak of the commodity market last year, an appropriate scenario would have been an orderly decline, but the financial institutions of the world were being battered, the ECB was off in La la land fighting an imaginary inflation crisis, on the eve of a recession, the BOE was under increasing pressure to follow suit so when it was necessary to collapse the commodity markets that's what had to happen imo.

When it becomes necessary for the IMF to get money nobody will worry too much about that, you've also got another major gold player who doesn't have any restrictions and even less control over it's destiny, that being the GLD, a lot of speculators parked in there waiting for a sign of a bounce in the markets, was in there myself for a while.

As regards the COMEX, for chap who believes in market manipulation and conspiracy theories it's funny how you look for protection in an establishment document. As it happens, I also believe in market manipulation, there's a lot of money in the markets, and wherever there's a lot of money, there's always dirt, I just don't dress it up into an elusive conspiracy theory, just plain old opportunistic manipulation