Wednesday, December 02, 2009

More Expensive Gold Benefits Australia

The flight from the U.S. dollar caused gold to reach yet another all time high in terms of U.S. dollars-for the first time rose above the key $1,200 per ounce threshold.

This is a factor which provides further support for the Australian dollar. While the main cause of the Australian dollar's 33% appreciation against the U.S. dollar this year is higher interest rates in Australia combined with higher risk aversion, rising prices of gold and other commodities are also contributing.

While most people still believe that most gold production is in South Africa and Russia, their share of global gold production have dropped dramatically in recent decades. These days China is the world's biggest gold producer with Australia coming in second. And gold is actually Australia's third biggest raw material export. A higher price of gold will increase Australian export earnings and so push up the value of Australian dollar.

While the relative share of South Africa and Russia in global gold production is a lot lower than before, they too and their currencies also benefit from more expensive gold, as does Peru (the firth largest producer). The other two large gold producers, China and America, benefits a lot less because first of all their overall economies are far larger, making gold mining less important for them, and related to that is that nonmonetary demand for gold is bigger there, reducing net exports.