Let's hope the Australian dollar follows falling bullion price
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.
Frequently Asked Questions about this Article…
The article explains the gold crash by noting that commodity prices often rise slowly but fall fast. The key driver was a reduction in perceived instability in US fiscal and monetary policy — when fears about runaway policy ease, gold corrects. That shift, together with several global central bank and economic developments, removed some of the demand that had pushed gold higher.
Gold’s relationship is less about the dollar’s level and more about the perceived stability of the policies that determine the dollar’s value. When US fiscal and monetary policy looks chaotic or strongly expansionary, gold tends to rally; when that chaos ebbs and policies look more stable, gold tends to fall.
The article highlights three main events that shifted perceptions of US policy stability and contributed to gold’s correction: the European Central Bank under Mario Draghi engaging in large-scale easing, stabilisation in the US housing market (and a US gas boom), and aggressive quantitative easing in Japan.
According to the article, the gold correction signals a return of the ‘King Dollar,’ which tends to deflate commodity prices relative to the dollar. That is generally good for global inflation (it eases upward pressure on prices) as many commodities come down versus the dollar.
The article says the relative stabilisation in US policy means the Australian dollar will struggle to rise from current levels. At the same time, because gold is a major Australian export, falling gold prices weaken Australia’s terms of trade and further undermine the AUD.
The piece states that gold is Australia’s third-biggest export — even larger than thermal coal — so a sustained fall in the gold price is likely to hit Australia’s terms of trade and weigh on the economy and the currency.
The article frames the correction as mixed news: it’s positive for global inflation because commodities tend to deflate relative to a stronger dollar, but it also means the US regains an ‘exorbitant privilege’ that could slow its economic revival. So the fallout is both helpful and problematic depending on the perspective.
The article doesn’t offer direct trading advice. It suggests investors first understand why gold moves — especially its sensitivity to perceptions of US fiscal and monetary stability — and recognise that gold is driven by faith in policy as much as intrinsic value. That background can help inform decisions, but it doesn’t replace personalised investment planning.
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