Weak Dollar Propels Gold's Status

The U.S. government’s proposed $700 billion bailout plan would boost the nation’s debt ceiling by 6.6% to $11.315 trillion and is putting pressure on the greenback as a result.

“As we get to the other side of this, the dollar will get crushed,” John Taylor, chairman of New York-based International Foreign Exchange Concepts, the world’s biggest currency hedge-fund firm, told Australia’s The Age newspaper.

Recent weakness in the U.S. dollar and turbulence in the financial markets are also helping gold regain its status as a universally recognized monetary anchor.

Alan Ruskin, head of international currency strategy for North America at RBS Greenwich Capital Markets told Bloomberg:

The massive increase in the deficit is starting to make people rethink the shape of all sorts of things, including the dollar.

After central banks cut their gold holdings a decade ago, the trend may be reversing, particularly with Asian banks, according to analysts.

“I’d be surprised if the Chinese hadn’t been nibbling at the gold market when prices were lower,” Mark O’Byrne, director of Gold & Silver Investments Ltd. told the Wall Street Journal.

There is plenty of speculation surrounding last Wednesday’s single-day record gain for gold, but it remains unclear whether any central banks were big buyers.

“We could not see a footprint from a central bank,” Jon Nadler, an analyst at Kitco Bullion Dealers told the newspaper.

If Washington is successful in authorizing the debt package, more dollars will be created, said John Bridges, an analyst at JPMorgan. This will be seen as inflationary. If Washington is not able to put it through legislation before the election, the market faces the risk of much more weakness and possibly deflation. Either way, it could be good news for gold.

Comments

[Kelly Liebe...:]

If either way us good for gold it seems that we are still seeing manipulation in play by the central banks... Who stands to lose the most if the dollar is crushed? First, the banks, Second, the Fed, Third, the current administration....reas... enough to keep gold low artificially...

2008 Sep 24 03:00 PM

[Smarty_Pants:]

With the huge shift in "dollar perception" implied by the size of the bailout package, about the only manipulation that could be attempted would be to slow the uptrend. The banks don't have the capital to smother a widespread rally, only to stunt it a bit.

Expect gold to trade in a directionless manner until Congress act on the bailout plan, one way or the other.

If the Chinese or Japanese governments decide to trade their dollars for gold in a meaninful way the price of gold will jump like a pole vaulter.

Let's not forget that many banks will go through this entire ordeal again when the next batch of short term financing IOUs comes due. The only party willing to lend will be the FED/USTreasury and they'll have to print what they loan.

2008 Sep 24 03:37 PM