Let's hope the Australian dollar follows falling bullion price

The gold crash brings to mind an old truth in commodity investing: prices ride the escalator up but catch the lift down.

To understand the causes of the crash, we need to know what makes gold go up in the first place. There are various marginal reasons - sovereign instability, inflation, jewellery demand - but one towers above all else, the value and stability of the dominant reserve currency, the US dollar.

Gold's real relationship is not to the dollar's value itself but the degree of stability or otherwise in the policies that determine that value.

That is, a high degree of instability in US monetary and fiscal policy, especially of the expansionary type, will lead to gold appreciation. It has a one-to-one relationship with chaos in value determining settings, not real value itself.

The conclusion to draw is that gold is falling because the chaos that has marked US fiscal and monetary policy since the global financial crisis is ebbing. And that is the case with the US budget coming slowly under control and, in a world of mad central bankers, monetary policy suddenly seeming much less radical than it did.

I'm not pretending to have all the answers here. Gold defies such an approach. Ironically for the true believers in gold's intrinsic value, it is the ultimate social artefact, more reliant than any fiat currency for its value on the degree of faith or scepticism in policy settings.

Thus, the three main events that have caused gold to correct are those that have shifted the perceptions of US monetary policy stability: European Central Bank president Mario Draghi joining the money printers; stabilisation in the US housing market and its gas boom, and Japan's mad and bad quantitative easing policies.

All of these have prevented the US dollar falling any further for now and into the immediate future.

The gold correction is thus good news and bad. It heralds the return of King Dollar and is good for global inflation as all commodities deflate relative to this benchmark. But it also means the US is once again saddled with its exorbitant privilege and that will slow its revival.

For Australia, gold's tumble means several things. The good news is that the relative stabilisation in US policy means the Australian dollar will struggle to rise from here. The bad news is that gold is the nation's third biggest export, bigger even than thermal coal, so the terms of trade will take another hit. Both undermine the Australian dollar and let's hope it falls soon because gold is signalling that the dream is over for commodities.