U.S. Dollar Rally Threatens to Upset the Gold Price

By: Miles_Banner

Last week the gold price dropped 2.3 percent. The silver price dropped 7.2 percent and the FTSE 100 index closed down 2.5 percent. Just as everything went up together in 2010 [see our article ‘The Three Major Questions That Will Determine the Gold Price in 2010’] everything comes down together too.

The bull rally of 2010, which started in December ‘09 has so far been the US dollar. The dollar index (The USD Index measures the performance of the US Dollar against a basket of currencies) rose to 80.36 its’ highest since July 13th 2009.

The reason for the dollar bull rally is partly because of the vulnerability of the stock markets and the weakness in alternative currencies. A stock market crash in 2010, or a correction at least, looks likely given the persistent financial problems with eurozone countries and American States, and the need to withdraw the underlying fiscal stimulus’s that are supporting economies.

How will this affect the gold price?

Traditionally worries in the stock market have been good news for the gold price. These factors mentioned above should in effect forecast a stronger gold price but investors are, instead, heading for safety by turning to the dollar. In short, fear is driving this dollar rally.

Fear is being driven by Europe, and specifically the PIIGS ( Portugal, Italy, Ireland, Greece and Spain). Their economic woes are threatening the stability of the Euro and stock markets the world over…

Last week the Greek government agreed with the European Commission to reduce its’ deficit to 2 percent by 2013…

The Greek Prime Minister broadcasted a message on national television to Greek households that they should expect ‘difficult and painful times ahead’…

In Spain high unemployment (nearly 20 percent) is threatening the measures they will need to take to tighten their debt problems [Click here to see news story].

The problems in the PIIGS economies have escalated fear in countries with similarly large deficits, such as Britain. Britain has a lower level of debt than Greece but it has a similarly large budget deficit. Just as the euro members are facing their own crisis the pound looks to be under renewed stress.

Calls for the pound sterling’s demise have been getting louder… Philip Gibbs, the manager of £1.4bn Jupiter Financial Opportunities Fund, told the Sunday Times “it is difficult to be positive on sterling in the short term; it looks more sensible to be long the dollar”. If more influential people publicly echo Mr Gibbs’s words the pound could find itself very unpopular.

Rumours did the rounds at the back end of last week that Greece and Portugal might sell their gold reserves to support the economy (a move unlikely to happen in our opinion). Britain doesn’t have that option since Brown’s blunder back in 1999 where, as Chancellor of the Exchequer, he led a UK sale of gold reserves to the tune of 400 tons at an average of $275 a troy ounce (a 20 year low, and an estimated £5.3bn loss to the UK) .

The path ahead for Britain looks gloomy. Inflation is starting to creep back into investors’ mouths. It looks to be a question of when not if. And when it does happen the gold price will surely be used as a hedge by UK investors.

With major currencies experiencing problems and stock market corrections inevitable the dollar rally can continue. These are signs of support for the dollar. But many still believe the US has a long way to go before its own economy is back in full swing, and the problems of huge, accumulated dollars in foreign reserves still has to be addressed. This is why in our eyes gold continues to look strong in the long term.

This week promises to be an interesting one for gold and the dollar. Find out what happens and visit our archive to see what has been happening so far.

Digger
Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

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