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What is Going on with Gold?

Why does Gold move up in price as fear hits the market?

Well, people view gold like money. It is the common thread the world has (and has always had) as a currency.

Therefore, when people get nervous about things– Greece, the United States, Italy to name a few– they turn to gold.

And also, during time of inflation– where $1 dollar today is worth something less tomorrow– people turn to gold.

So, as inflation has risen and fear around major currencies has also risen (the US Dollar, the Euro) — gold has risen right along with it!

What is the Big Mac Index?

The Big Mac Index is a concept related to Foreign Exchange (FX). Before we go any further: What is FX?.

It was introduced by the magazine The Economist in the 1980s. It is designed to determine if certain currencies are over or undervalued. It uses an incredibly sophisticated measuring tool — the McDonald’s Big Mac.

How is this done? Take the price of a Big Mac in one country (let’s say in the US a Big Mac is $3.5). Then divide it by the price in another country (let’s say in Canada a Big Mac is 4 Canadian Dollars). So divide 3.5/4. That equals 0.875.

Now the actual exchange rate of USD to CAD is 1.05 (it take 1.05 USD to buy 1 CAD). As of July 31, 2011. Compare this to your reading of the Big Mac Index. Since 0.875 is lower than 1.05, the Big Mac Index would say the first currency, the US Dollar, is undervalued relative to the Canadian Dollar.

Now– we just completely made up the values for a Big Mac– so don’t use this example for anything more than defining the concept.

Tags: Big Mac Index, Foreign Exchange, FX
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