Declining dollar may push gold to $1,000/oz level

Posted : July 16 2009

LONDON : Where is gold price headed? Will gold be the best hedge against declining dollar? Will gold price plunge to $800 or boom to $1000? Following is an analysis of where gold price is headed, from Fortis Metals Monthly.

After reaching $981.75/oz on the London PM fix of 1st June, its highest fix since 24th February, gold looked set for another assault on the $1,000/oz level, last breached in March 2008.

It was not to be however, with a stronger dollar and reduced fear of economic collapse sidelining the yellow metal. The price fell
first to around $950/oz and then back towards $930/oz on 13th June, where it held. This volatility essentially followed moves in the US dollar as with many commodities right now, gold is being bounced about by external markets, which in turn are suffering a bout of indigestion, a surfeit of conflicting macroeconomic data.

The dollar/gold correlation has been very strong of late and while the move is not 1:1 (from peak to trough, the move in gold was 11%, in the dollar v. the euro, 7.5%), such a relatively strong correlation is a sure sign that there is little else driving the gold market the forces behind a push for higher prices are being offset by those favouring lower prices.

In such a scenario the exchange rate fluctuations account for most of the price moves, a situation we expect to persist for some time to come. It will therefore take a truly strong swing towards a much weaker dollar to see the price get to and sustain itself at
$1,000/oz.

The next major event in the gold market is likely to be details of the renewal of the Central Bank Gold Agreement (CBGA) and, related, the IMF's proposed sale of 403.3t of its bullion reserves.

Congress is shortly to give its, and therefore the US's approval, and the IMF Executive Board authorisation is likely to follow soon after. But with only a little over three months to go in the current CBGA, it is likely the IMF will be the lynchpin of a new agreement.

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Declining dollar may push gold to $1,000/oz level

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