The current state of the U.S. dollar does not bode well for the...

The current state of the U.S. dollar does not bode well for the greenback. This month, the dollar depreciated significantly, falling to its lowest value against the yen in the last two and a half years. Against the Swiss franc, the U.S. dollar has fallen to a historical low; the downward push was prompted by continuing signs of American economic woes, including the world’s largest finance broker, Merrill Lynch (MER), reporting a $16.7 billion dollar loss from the plummet of sub-prime mortgages – the worst quarter in its history.

With the value of the American paper continuing its decline, many investors are looking elsewhere to invest their funds. Considering that gold and the U.S. dollar move inversely in value, the question now begs, will gold prices continue its tear upwards, potentially hitting $2000 as the next milestone? The popularity of gold rises during economic and political turbulence, satisfying investors’ psychological needs of an inherently valuable, safe asset.

Indicators for Rising Gold Prices

It is estimated that the price of gold that hit $800 during the 1980s would have translated to $2200 in current prices. Indeed, comparing year to year growth, gold has climbed 30 per cent since last year. Barclays Capital forecast that gold may hit $1,000 during 2008 – and Goldman (GS), Citigroup (C), Credit Suisse (CS), and UBS (UBS) agree.

Although gold crossed $900 this week, hitting $1000 may take an extended period of time. With that said, the indicators are pointing towards a rise in bullion. Thus, the possibility is certainly there.


Oil Prices Oil prices have already scaled the level of $100 a barrel. Will we see $200? That is absolutely possible. In an era of extreme uncertainty and shortages, oil has a strong possibility of escalation. Bullion prices move in-line with oil because gold is considered to be a valuable asset hedge against inflation.

Weakening Dollar Although the value of dollar is no longer linked with that of gold, investors take refuge in gold on any weakening of the currency. As the dollar goes further down, investors will hedge gold in order to preserve their investments – bullion is the ideal alternative asset that has inherent built-in value.

Continuing Strong Demand Demand for gold will continue to pour in from Asian countries, especially China. Historically, and in present times, Asian countries have been heavy consumers of bullion. Since supplies are short, strong demand will push up gold prices. At present, there is simply more demand than the supply.

Increasing Market Volatility In the event of increasing market volatility, gold will continue to rise, as bullion is considered a safe-haven investment. Instead of putting their cash to the sidelines, investors place it into gold.

Inflationary Pressures Federal Reserve Movements When inflation rises, so do the prices of gold. Continuing commodity prices will push up the prices of gold. Expect actions taken by the Federal Reserve to significantly impact the price of gold, as investors closely watch Bernanke’s words and motions.