While many Americans cheer the idea of a strong U.S. dollar, the economic implications of such a status have myriad economic implications. When the dollar is on the rise and enjoying positive news, it generally creates short-term downward pressure on the prices of commodities such as oil and gold—but in recent weeks, despite the ups and downs of the dollar, gold has been blossoming. Many would argue it’s at least partially because the dollar’s strength is much more precarious than it might first appear.

Supply and Demand

The counterintuitive relationship between the strength of the dollar and the price of commodities is due to a number of complex factors. The primary influence, however, comes from the use of the U.S. dollar as the global reserve currency. This is rooted in the most basic of economic factors, supply and demand. When the dollar is strong, it takes more in foreign currencies to purchase an ounce of gold or a barrel of oil. That makes the items more expensive, lessening demand. China is currently working on undermining the dollar as the world’s dominant reserve currency, which could have long-term negative effects.

Of course, the opposite is true as well: a weakening dollar will make the commodities cheaper, and the increasing demand will, in theory, drive up commodities prices. While that is the simple interpretation of the process, there are many other components in the ultimate prices that the market set. While many gold investors watch the ICE Futures Exchange for the latest Dollar Index quote, that is only part of the assessment to consider.

Everything from world and local economic and political situations, weather conditions, costs of production and numerous other items are elements in determining the market price of gold locally and nationally. Let’s take a look at the implications of the dollar in a new and changing marketplace.

Short-Term vs. Long-term vs. New Environment

Every knowledgeable and experienced gold investor and trader understands that there are differences in the near-term fluctuations and longer-term realities of commodity prices. Those who are constantly buying and selling gold are, of course, attuned to even minor rumors about the status of the dollar.

Over the past three years the dollar has stood above many other Western currencies as the U.S. economy, while still not robust, did better than those of most other Western countries. Many analysts point to that factor for keeping the price of gold from breaking through to new highs. That has proven proper for the near-term.

However, many who are focused on the long-term status of the dollar and the global economy see a different story. In fact, an increasing number of analysts see the return of a recession, and some, including Bloomberg Business, even claim it has begun in parts of the United States.

The chief U.S. economist at Deutsche Bank Securities Inc., Joseph LaVorgna, points out, “The impetus for weakening regional economies is the huge fall in energy prices and other commodities prices, which is taking a tremendous toll.” 1

A Changing Role for the Dollar

The simple fact is that the U.S. cannot continue to carry the economies of many Western countries on its shoulders if a full-fledged recession is to be avoided, much less a recovery continue.

It is for these reasons many are looking past the seemingly strong dollar, recognizing it is a strength only relative to other severely wounded currencies. Looking into both the intermediate and longer-term future shows a multitude of factors impacting the dollar.2 Not the least of these is the active effort by Iran, Russia and China to weaken and even dislodge the dollar as the world’s reserve currency.3

What will happen to other currencies and the state of the world marketplace when the dollar loses its place as “top dog” in the global economy? It is this sort of question that has many insightful traders adding to their inventories of precious metals in a steady and calculated manner, understanding the implications for the dollar in the long-term.

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