Gold Price Hits New High As The Dollar Weakens

The rise in the gold price over the last month or so isn’t that surprising – fundamentally it just had to happen… and the gains are not over yet…

Four weeks ago I told readers of my Outstanding Investments newsletter to buy a specific physical gold exchange traded fund at $66.20 a share. At yesterday’s closing price, the fund stood at $73.54 a share – and I believe it has much further to go.

All the fundamentals were pointing to a surge in the gold price and that’s why I urged my readers to buy into the yellow metal with urgency. It now looks like it was a great time to buy into the gold story.

The gold price rose to its highest level in almost thirty years in Asian trade this morning – as the outlook for the dollar gets even grimmer than it was just a few short weeks ago. I expect that the US currency will continue to weaken further and that fears of oil-price inflation will also remain at the fore. All this is music to the ears of the gold bulls.

The price hit an all-time high in early 1980 at $850 an ounce, as the high oil price combined with the Soviet invasion of Afghanistan stoked a climate of investment fear. The situation is not too dissimilar now.

The oil price hit another all-time high this week – and, as the peak winter season approaches, then price should be supported going forward. But what is really driving the gold price at the money is that scrap of toilet roll known as the dollar.

The man with the Midas touch

 Ben Bernanke’s 50-basis-point cut in the Fed Finds rate is good for the US housing market and good for stocks, but it makes dollar investments much less attractive.

Indeed, the Telegraph reported this morning that Saudi Arabia has refused to cut interest rates in unison with the Federal Reserve for the first time ever. The implication of this is serious. It means that the kingdom may be preparing to break the dollar currency peg – and if the Saudi’s do that, there will be a charge out of the dollar across the Middle East.

China is also posturing. It is using its power over the dollar as a bargaining chip in its current trade dispute with the US. It has hinted that it may liquidate its massive US treasury holdings if Washington imposes trade sanctions to force a yuan revaluation.

The largest holder of US treasuries is Japan (click here to see US government figures showing the dollar value of treasuries owned globally). If China starts to sell its US bonds, you can bet your bottom dollar that Japan will follow suit. The implications for the dollar will be very serious indeed.

Enter his web of sin

Sure as eggs are eggs, the aggressive rate cut by the Fed this week will stoke US inflation. It’s basic economics. This is always good for the gold price.

The commodity is also in short supply - another bullish sign. Demand remains very high – with half of the gold mined in the second quarter of this year being consumed by just one country – India.

The latest figures from the World Gold Council revealed that India’s total demand hit 317 tonnes in the quarter. As India’s economy continues to grow at an unprecedented rate, demand is set to increase further.

Russia is also a major market for gold. Consumption in the second quarter rose 27% to 20.3 tonnes. Globally, net retail investment rose by 51% by weight to 132.9 tonnes, and 60% in monetary value to $2.9 billion, compared to Q2 2006.

Russia and India are creating millionaires at a rapid rate. The number of dollar millionaires in Russia exceeded 100,000 in 2006, that is 15.5% higher than 2005, according to Merrill Lynch and Cap Gemini’s 11th annual World Wealth Report.

It is clear that demand remains robust, but what about the other side of the equation? Overall supply remained tight in the second quarter, falling 7% on a year-on-year basis and by 4% in the first half of 2007.

Fundamentally everything appears to be in place to take the gold price to a new record high. The ride will undoubtedly be bumpy – but it’s a ride you should definitely take.