With the price of gold taking a tumble, we turned to Associate Professor Werner Antweiler for a Q&A about the recent rout and long-term prospects of the precious commodity.
Q: Why is the price of gold fluctuating?
A: 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 an ounce.
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 under way. It is more likely than not that the gold price will drop below the psychological $1000 an ounce threshold before the price stabilizes.
Q: What will the impact be on Canadian currency and markets?
A: Canada's economy is exposed more to resource prices than other economies. The Bank of Canada's exchange rate model (known as the Amano-van-Norden equation) 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 the Canadian Dollar. Canadian markets reflect the underperformance of the resource sector. Whereas, the S&P TSX composite index gained 4.1 per cent over the last 12 months, the S&P TSX sub-index for materials lost 30.9 per cent. And the TSX composite index has lagged behind the S&P 500 in the United States, which gained 20.5 per cent over the last year.