Both the Canadian dollar and the price of gold have taken a tumble as of late and the rest of 2013 may see more instability. UBC Sauder School of Business prof. Werner Antweiler talks about the future of gold prices and the loonie.
Why is the price of gold fluctuating?
In the last few years the price of gold has shot up like a rocket. But as Isaac Newton observed: what goes up must come down. Ten years ago gold traded at $300 an ounce, and at its peak in 2012 it traded at close to $1,900. Investors have been flocking to gold for its (wrongly) perceived safety, further attracted by prices that only seemed to go up and up. The gold bubble has burst and a downward correction is underway. It is more likely than not that the gold price will drop below the psychological $1,000 an ounce threshold before stabilizing.
What will the impact be on Canadian currency and markets?
Canada’s economy is exposed more to resource prices than others. The Bank of Canada’s exchange rate model allows explicitly for the price of energy and the price on non-energy commodities to exert influence on the Canadian dollar’s exchange rate. Higher world prices for non-energy commodities typically cause the Canadian dollar to appreciate, and vice versa. The recent drop in gold prices will contribute to a sell-off of stocks in resource companies that mine gold, and this puts downward pressure on our dollar. Canadian markets reflect this. Whereas, the S&P TSX composite index gained 4.1% over the last 12 months, the S&P TSX sub-index for materials lost 30.9%. And the TSX composite index has lagged behind the S&P 500 in the United States, which gained 20.5% over the last year.