Is gold beginning to break with the dollar again?

Gold has been recovering a little despite continuing dollar strength against the Euro and some other currencies.

Lawrence Williams
Sunday , 14 Feb 2010

The U.S. dollar has had a reasonably strong week - at least against many other currencies, notably the Euro which has been hit by economic mayhem in Greece and worries about the rest of the PIGS countries which, in addition to Greece, constitute Portugal, Ireland and Spain. This is not to mention some of the recent East European members of the Euro club which may be in even more difficulty. All these are running huge deficits and their plight could, some feel, lead to the destruction of the Euro. While this is unlikely, the stronger Euro nations, notably Germany and France, seem to be decidedly lukewarm in bailing out their less fortunate cousins in the Euro zone.

With the pound looking weak too - but at least being a currency which still floats on its own against the dollar - and the Euro - there is likely to be more dollar strength vis-a-vis the European currencies in the weeks ahead, as bankers and governments see it as a safer place to keep their money. Such dollar strength would normally suggest gold price weakness, and that was certainly the case early in the week with gold plunging, but since then it has made a recovery, despite continuing dollar strength.

What one assumes this means is that there is growing acceptance that the dollar is no more than the best of a bad bunch and longer term virtually the whole of the Western world, including the U.S. remains in dire financial straits. What is happening with the Euro today with several of the weakest nations unable to devalue themselves out of trouble, could happen in the U.S tomorrow with a number of U.S. states in similar internal budget difficulties. California is the most notable of these and with a GDP bigger than many countries a Californian default would hit markets exceptionally hard. Not that this will be allowed to happen of course.

With Europe heading for a double dip recession, and the U.S. in danger of the same, there seems little doubt that Quantitative Easing will continue on both sides of the Atlantic, with its long term adverse impact on national money supply control and the prospect of serious inflation ahead.

So where do people turn for wealth preservation safety? Well, gold could yet again be the answer as it has been over the ages and there are indications that investment flows may be starting to return to the yellow metal after a short hiatus. Our Asian cousins have long been believers in gold as a store of wealth and there are now signs that India - the greatest believer of all - is beginning to return to the market as the populace comes to accept the higher gold price levels may continue. And with China's huge sovereign wealth fund, CIC, also hedging its bets with a big investment in the SPDR Gold Trust ETF, any return to gold investment growth in the West should see another sharp upturn in the gold price level. Whether we are at that stage yet will become apparent in the weeks ahead.

http://www.mineweb.co.za/mineweb/view/mineweb/en/page33?oid=98249&sn=Detail&pid=1

Dan