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Sinking dollar fuels new gold rush

November 11, 2009

Worries about the fast-falling dollar are sending gold prices to record highs.

Gold rose to $1,111.70 an ounce Monday as the dollar sank to a 15-month low against other major currencies in New York trading. The precious metal and the U.S. currency have had an inverse relationship since March.

At that time, a budding economic recovery revived interest in investments that grow with the economy, like stocks and commodities. Investors began to pull their money out of safe-haven Treasuries and the dollar to buy those riskier investments – a trend that continues to this day and that helped lift the Dow Jones Industrial Average 204 points Monday to a new high for the year of 10,227.

As the dollar dropped, central banks around the world, which have trillions of dollars in reserves, worried about the dwindling value of their holdings and started to diversify out of the dollar by putting more reserves in gold, euros and other strong currencies like the Australian dollar.

A complex chain reaction drove further declines in the dollar and spurred further rises in the prices of gold, commodities and stocks.

Investment analysts said the declining dollar is at the center of the global trend.

“The world is tired of having billions of pieces of green paper crammed down its throat,” said James DiGeorgia, a commodities analyst and author of a book about the bull market in gold. “Other governments are tired of ‘investing’ in dollars and Treasuries, only to watch as the U.S. inflates away the value of their assets.”

China in particular has voiced its concern that the rapid decline of the dollar will diminish the value of its nearly $2 trillion in dollar holdings and has been leading the charge into gold, increasing its reserves of gold from 394 metric tons in 2000 to 1,054 metric tons this year, Mr. DiGeorgia said.

India and other nations also have been adding to their gold reserves through the purchase of gold that the International Monetary Fund has been selling to fund economic rescue programs.

Many analysts think the dollar will continue to decline. Mr. DiGeorgia attributes the drop in the dollar to the burgeoning of the U.S. budget deficit to $1.4 trillion this year combined with the Federal Reserve’s easy-money policies, which the Fed has pledged to maintain until the economy has clearly recovered from the recession.

The Fed’s pledge not to raise short-term interest rates from close to zero for an extended period has encouraged investors to borrow money at low rates in the United States and invest that money in fast-rising stocks, commodities and other investments around the world. Because growth prospects are strongest in China, Brazil and other major emerging countries, much of the borrowed money has gone into their markets, further pushing down the U.S. dollar.

The dollar got another downward jolt this weekend from a statement by the Group of 20 finance ministers acknowledging – and accepting – that this leveraged investment strategy is pushing down the dollar. In a communique in Scotland, the G-20 said the dollar remains “strong” overall, particularly against the Chinese yuan and other Asian currencies because central banks in those countries generally link their currencies to the dollar.

“Get ready for further U.S. dollar declines, as well as continued gains for currencies, commodities and equities ahead,” said Mark Frey, a trader at Custom House, a Canadian investment firm. “The IMF gave its tacit approval to immense risk-taking and the continuation and acceleration of the mother of all carry trades,” he said, referring to the leveraged investment strategy that has pumped up stock markets around the world while driving down the dollar.

For investors who worry about the implications of the massive move against the dollar, which is rapidly reducing purchasing power for Americans and could become a potent force for inflation as it raises the prices of oil and other imported goods, gold has become a vital safe haven.

Mr. DiGeorgia recommends that his clients invest 20 percent to 30 percent of their assets in gold “as insurance against the stupidity of politicians” who support the “debasement” of the dollar.

Having predicted in 2005 that gold would surpass $1,000 within five years, Mr. DiGeorgia is now saying it will surpass $2,500 within another three years.

Jeffrey Nichols, senior economic adviser at Rosland Capital, also expects gold to remain in the “four-digit” range. He notes that countries that buy the most gold have quickly adjusted to prices higher than $1,000 and have increased their demand for gold.

Mr. Nichols sees a “near perfect storm” brewing for gold: the easy-money policies being pursued by the Fed and the central banks in other developed countries; major gold purchases by India, Sri Lanka and other countries; and the prospects for weak growth and high unemployment in the United States.

“Put the news together and it should come as no surprise that gold” is reaching new records, he said. Gold could go still higher if more central banks purchase gold from the IMF, he said, but it also could “sell off a bit after such an impressive run-up.”

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2 Comments leave one →
  1. January 3, 2010 4:43 AM

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    Sinking dollar fuels new gold rush

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