SYDNEY -- The Australian dollar and gold prices show no sign of deflating, after both hit six-month highs over the weekend.
Gold is traditionally seen as a hedge against inflation (or economic stimulus) by investors, so the price tends to move higher, as inflation rises, or when central banks unleash "economic easing," which tends to devalue their local currencies. Investors traditionally buy gold when they are worried about inflation. Inflation erodes the buying power of your money, but some consider gold "inflation-proof," making it attractive when inflation is on the rise.
The three rounds of quantitative easing in the United States are considered by many to be likely to drive inflation higher, which may explain investors' fondness for gold, and its record price.
These same inflationary effects also make other currencies more attractive by comparison, which is partly behind the strong Australian dollar.
Both gold prices and the Aussie dollar rose after the U.S. Federal Reserve recently announced plans to keep buying bonds to stimulate the U.S. economy until the employment rate falls markedly.
Gold is currently trading around US$1,775 per ounce, while the Australian dollar is buying around U.S. 105.3 cents.
Many Australian gold miners have seen their share prices tumble in the last six months by much more than the falls in the gold price. Newcrest Mining (ASX: NCM.AX) shares hit a 52 week high of over $36 back in February this year, before slumping to a low of just under $21 in July. Since then, the shares have recovered, and are currently trading around $29. Likewise Alacer Gold Corp (ASX: AQG.AX), OceanaGold Corporation (ASX: OGC.AX) and Resolute Mining (ASX: RSG.AX) were all down around 24% to mid-July, but have since recovered somewhat.
Gold is seen by many as a currency rather than a commodity, and is only used in small quantities for industrial purposes, so it tends to follow different cycles than other commodities like copper or nickel.
With the gold price at current levels, this may be an opportunity for investors to pick up some cheaper Australian gold stocks. A fall in the Australian dollar versus the greenback would be a bonus for miners and their investors alike -- as that would increase the amount of Australian dollars they get for selling gold in U.S. dollars.
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