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Riding High: Dollar, Gold Hit New Heights

Mike King
September 20, 2012

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.