Gold/US dollar connection unravels

The connection between the gold price and the strength of the US dollar has been amply illustrated in the past few months, with many taking the view that gold is a marker of dollar devaluation or strength.

The dollar remains weak and could even fall further but analysts are suggesting that the currency’s downturn has now created problems for the major trading partners of the US.

As US imports become more expensive these economies suffer, and their currencies lose strength against the dollar.

It can be argued that this should not make any difference to the relationship between the strength of the dollar and the gold price but if the dollar is seen as no longer falling against currencies such as Sterling and the Euro, perceptions in the financial markets are likely to change.

Investors may be convinced that the value of the dollar against major currencies will settle and the upwards pressure on the gold price will lessen.

In addition, evidence that the US economy is stronger than predicted will encourage investors to move money away from gold and back into the stock markets.

However, some analysts are arguing that the full ramifications of the US sub-prime mortgage crisis have yet to be felt and the safe-haven qualities of gold remain attractive.

While the continued weakness of the dollar will put upward pressure on the gold price, recent forecasts of the metal reaching $1,000 oz by the turn of the year now lack credibility.