Despite the many skeptics, the gold market keeps on making new highs (see chart below) . Earlier today, it hit US $1487 per ounce. As we have mentioned on several occasions here, this price move isÂ exactly whatÂ Austrian theory would expect, given the unprecedented monetary stimulus that’s been applied by central banks around the world, led by the U.S. Federal Reserve, in response to the financial crisis.
US$ Price of Gold (Monthly), April 2001-present
Â Source: World Gold Council
So too, the more US dollars that get printed by the Fed, the lower its valueÂ in the foreign exchange market. Accordingly, we areÂ simultaneously witnessing a devaluation of the greenback. The demand for dollars is, of course, also a factor in establishing the greenback’s price on the currency markets. In the immediate aftermath of the financial crisis, that demand rose considerably as investors sought a haven in US treasuries. But with investors regaining their risk appetites , the decade-longÂ downtrend in the US currency,Â initially set in motion by Alan Greenspan’s easing of monetary policy to deal with the popping of the dotcom bubble, has reasserted itself. As the graph below indicates, the US dollar is flirting with its 2008 all-time lows.
Trade Weighted US Dollar Index (Monthly), Apr 2001-Present
Source:Â St. Louis FedÂ
Needless to say, this depreciation is also consistent with Austrian theory. Â