Does the Falling Dollar actually Strengthen the Gold and Oil Markets?

This year has not been a good one for the value of the US dollar, with its value free falling. But that fact has in fact increased the value of commodities such as gold, and oil.

On Monday November 9th 2009 the Dow Jones Index reached its highest level in well over a year, thanks in great part to the surge in value of energy and materials stocks. The dollar on the other hand fell to its lowest level in fifteen months, according to the ICE Futures US dollar index.

This disparity in activity makes it hard for the investor to truly gage how fast the market is recovering. Usually investors use the value of the dollar as a guide when making their purchase or sell decisions. Outside the US investors are seeing the dollar as a weak currency and are taking advantage of that fact, using it for a purpose known as “carry trade” to allow them finance their non US purchases.

Historically commodity prices tend to go up as the dollar weakens. On the same day as the Dow Jones rose to its new high gold was valued at $1,100 an ounce and crude oil was priced at $79.43 a barrel, a $2 rise that will no doubt soon be reflected once more at the gas pump.

So is the market truly recovering? To the amateur it is hard to see that it is if the dollar remains so weak against other countries. But financial analysts believe it is, and that this drop in the value of the dollar is a natural part of the overall recovery process.

Still though there are factors that still may send the Dow Jones back down again soon. US unemployment still stands at its highest levels in years and investors are nervously waiting for the quarterly reports that will indicate how much consumers are spending in the all important run up to the holidays. The fear is that that figure will be fairly low as uncertainty about the economy may cause many a consumer to trim their holiday shopping budget.

All of this aside those who deal in commodities are profiting from all of the markets up and downs, demonstrating once again that the purchase of such commodities can be a financially sound investment, even in difficult economic times.