The relationship between currency exchange rates and commodity prices, particularly gold, can be confusing. Let’s clarify how fluctuations in the EUR/USD exchange rate affect the value of gold, especially when considering a benchmark figure like $3000 USD.
Imagine a scenario where the EUR/USD exchange rate is initially 1.5, meaning €1.00 equals $1.50. If gold is priced at $3000 USD, then for a European buyer, this would cost €2000 (3000 USD / 1.5 EUR/USD). This is because gold is globally priced in US dollars. The euro price is derived from this dollar price and the prevailing exchange rate.
Now, consider what happens if the EUR/USD exchange rate shifts to 1.0, meaning €1.00 now equals $1.00. If the dollar price of gold remains constant at $3000 USD, the price in euros for that same unit of gold would become €3000 (3000 USD / 1.0 EUR/USD). This illustrates that as the euro weakens against the dollar (EUR/USD moving from 1.5 to 1.0), the euro price of gold, when priced in USD, increases.
This principle extends beyond gold and applies to various goods, especially imports. Consider the pricing of an iPhone. When the iPhone 13 Pro launched at $999 in the US and £999 in the UK, the exchange rates were different than when the iPhone 14 Pro launched. The iPhone 14 Pro maintained the $999 price in the US but increased to £1149 in the UK. This price adjustment reflects the weakening of the GBP against the USD.
Importantly, this currency effect is most pronounced for commodities like gold with globally set USD prices and for imported goods. Goods produced and sold within the Eurozone, with costs largely denominated in euros (like wages paid in EUR), are less directly impacted by EUR/USD fluctuations. For example, a car factory in Europe paying workers €15,000 annually will face the same labor cost in euros regardless of the EUR/USD rate. However, if that factory imports parts priced in USD, those imported components will become more expensive in euros when the euro weakens against the dollar, affecting the final euro price of the car.
In conclusion, while local market prices for some goods might appear stable in local currency, the global pricing of commodities like gold, typically in USD, means that exchange rate fluctuations, such as changes in the EUR/USD rate, directly influence the price experienced by buyers in different currency zones. Understanding this currency conversion is crucial when evaluating the cost of assets like gold in euros, especially when the benchmark price is set in US dollars, like our example of $3000 USD of gold.
