Forex Analysis: Is Gold the Best Option?

Because of the weakening U.S. Dollar, a lot of forex traders and investors are looking to shift their assets into another currency. Indeed, the Euro and the Yen are attractive prospects, but for those looking to benefit in the short to medium term, gold may bring the most value for your money.

The key issue when it comes to gold is the U.S. Dollar, whose value, of course, is dependent on the state of the U.S. economy. As the economy goes, so does the greenback in the forex.

When the sub prime housing crisis struck, the Federal Reserve held the view that two interest rate cuts would be sufficient to counter any adverse effect it will have on the U.S. economy. However, by the end of 2007 it became apparent that two rate cuts would not be sufficient to offset the credit and housing crunch, and a third cut is expected early in 2008.

As forex analysts point out, the Fed rates are at its lowest level since 2005 Whether another cut will help the economy is still unclear, but the rising oil prices, which could trigger inflation, may make further rate reductions (beside the one expected in January) untenable.

Another reason why the U.S. Dollar may fall, and gold to go up, is the weakening manufacturing sector. According to the latest industry figures, the percentage dropped to 47.7 in December, down 3 percentage points from October.

What this data means for the forex analyst is that a dip in the performance of the manufacturing sector would lead to increased unemployment and less consumer spending, which would affect the purchasing power of the American consumer.

The uncertain economic situation in the United States, coupled with $100 oil prices and tensions in Iran and Pakistan, makes gold all the more attractive to the investor. As the Dollar falls in the forex, gold, because of its negative correlation to the greenback, will rise in value. Recently, the metal reached an all time high of $859 per ounce, the highest recorded in its history.

More than any other forex currency, gold is now seen as a safe haven in these uncertain times. Although its high price may be due in part to speculation and sentiment, it is still an attractive bet. Besides gold, other commodities like silver and platinum are gaining in value, so the forex trader and investor can look at these options as well.

As mentioned earlier, there are other currencies that an investor can turn to, and one can include the Australian and Canadian Dollar, as they correlate positively with precious metals. However, for forex traders looking to profit for the short and medium term, it is best to go for gold.