The gold market has started the new year in a bullish mood just as it closed out the old year. COMEX gold settled above $900/oz for the first time in history on January 14, as the rally in precious metals continues.

The spot January contract settled at $901.60/oz for a gain of $5.50 over the settlement price on January 11, and the more active February contract settled at $903.40/oz, up $5.70.

The milestone also represents the fastest rate of increase in gold prices; spot gold has gained more than $100 in less than a month -- bouncing from a settlement price of $799.20/oz on December 20, 2007.
Gold prices denominated in dollars rose by an average of 17.8% over the past seven years.

After a rollercoaster session on January 15, Comex gold closed virtually unchanged, down 80 cents to $902.60. It saw a brief dip below $900, getting down to $895.50, where it found support, a total price swing of close to $20/oz between the intra-day low and the intra-day high.

Various market analysts as well as traders have attributed the recent surge in gold prices mainly to the weakness of the dollar and the upswing in prices of crude oil. Oil prices are now around $100/barrel, a price that was unthinkable just a year ago.

The gold market is now enjoying its longest rally since the metal began trading openly on an exchange in 1974, following action by the US government to sever the Midas metal's link to the dollar. Without the backing of gold, however, the dollar has been sinking lower ever since rather than floating against other major currencies as intended.

While gold has registered strong gains against the dollar over the past seven years, the metal has not done as well against certain other currencies simply because those currencies have been rising in value when compared with the dollar. To put it another way: The dollar has been mostly declining in value against gold (which analysts believe maintains its value), rather than gold gaining against the dollar.

According to statistics compiled by GoldMoney newsletter, the gold price denominated in euros, for example, rose only 17.9% in 2007, compared with a gain of 31.4% when denominated in dollars -- reflecting the fact that the dollar has been losing ground heavily against the European currency in 2007.

Gold prices denominated in dollars rose by an average of 17.8% over the past seven years. This compares with a 10.6% increase in the average gold price denominated in Australian dollars over the seven-year period, 10.9% against the Canadian dollar, 10.7% against the euro, 17.7% against the Japanese yen and 13.2% against the pound sterling.

On a yearly basis, the US dollar gold price rose by 2.5% in 2001, 24.7% in 2002, 19.6% in 2003, 5.2% in 2004, 18.2% in 2005, 22.8% in 2006 and a whopping 31.4% in 2006. The Canadian dollar gold price rose by 8.8% in 2001 and another 23.7% in 2002, then declined by 2.2% in 2003 and fell by another 2% in 2004 before gaining 14.5% in 2005, 22.8% in 2006 and 10.4% in 2007.

Gold denominated in Japanese yen rose by 17.4% in 2001, 13% in 2002, 7.9% in 2003, 0.9% in 2004, 35.7% in 2005, 24% in 2006 and 24.7% in 2007. And against the pound sterling, gold rose by 5.4% in 2001, 12.7% in 2002 and 7.9% in 2003, then declined by 2% in 2004. Gold resumed its uptrend with a 31.8% gain in 2005, a 7.8% increase in 2006 and a rise of 29.2% in 2007, the GoldMoney statistics indicate.

Consensus among analysts

There is a consensus among analysts that the main driver for the current gold market rally is weakness of the dollar against other major currencies. That weakness stems from US economic malaise of triple deficits: balance-of-trade, balance-of-payments and the budget, according to various economists and analysts. Unless the US stops spending more than it earns and ceases importing more than it exports, the dollar will continue to depreciate in value.

Doug Casey, chairman of Casey Research and publisher of International Speculator, pointed out in a recent issue that the trade deficit isn't just the result of American gluttony.

"Much of the imbalance results from foreign governments intervening to keep their currencies from appreciating against the dollar," said Casey. "Cheaper currencies, of course, make foreign-made products less expensive and, therefore, more attractive to US consumers. Consider it a gift. But as many are now learning, it's a gift that falls into the same category as the Trojan Horse."

Casey added: "The cycle is exacerbated by foreigners deciding to invest their freshly-minted US dollars back into US bonds, treasuries, agencies and stocks.... Constant stepping up to the buying window for US paper has provided a large infusion of cash to US institutions, including the Treasury, keeping the credit channels well greased and US interest rates surprisingly low."

The 'rapid growth' in US money supply to help ease the financial crisis triggered by the collapse sub-prime mortgages "shows clearly that the government is already in the process of sacrificing the dollar in an attempt to shore up the sagging economy," according to Casey.

The Aden Forecast also painted a bleak outlook for the dollar. The December issue said: "The dollar is not the safe currency it once was; the rest of the world recognizes this, and they're pushing it away."

The report continued: "If we had to pick one trend that's going to continue, without a doubt it would be the ongoing drop of the US dollar.... As long as the government can create any amount of money it wants, the dollar is destined to go the way all paper currencies have gone."

Thus the dollar is key to the gold story. Gold and the US dollar have been operating in an inverse relationship, like scale and weight: The dollar goes up in value, the gold price denominated in dollars go down; the dollar declines in value, gold prices go up. So, wherever goes the outlook for the dollar, there goes the outlook for gold.

Created: January 16, 2008