Gold and the New World Currency for Oil

Australia’s central bank raised interest rates by a quarter-point yesterday. Australia is the first G-20 country to act on its belief that global economic recovery has taken hold and that stimulus programs can start to be reversed.

Yesterday’s rally can be considered a response to Australia’s confidence. It can also be considered a response the sharp sell-off on Friday and a weaker dollar this week.

Gold rallied strongly yesterday as the US dollar dropped. That was significant. The Fed has essentially promised that interest rates will remain low into next year. If central banks around the world start hiking rates, and the US Fed stands pat, then US GDP has the potential to outperform. This potential is good for stocks, and possibly even unemployment. So stocks rally.

But keeping rates low as growth picks up invites inflation, so gold rallies.

Traders did a pretty good job of expressing these two somewhat contradictory themes yesterday.

Of course, inflation and growth can only co-exist for so long. Eventually, interest rates will have to rise to keep inflation in check.

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