Ailing dollar sets gold on track to top US$1,000

Dollar weakness could prove a boon to gold, pushing prices to new highs for the year above US$1,000 (HK$7,800), as the influence from stock markets and attitudes towards risk wane in favour of its traditional driver.

As the dollar tumbled in the past several weeks, investors looked anew at its fundamentals at a time when gold- specific factors were lacking, leaving the metal to move unfettered through key resistance at US$935.50.

It continued to soar, closing at US$980.30 an ounce on the COMEX division of the New York Mercantile Exchange on Friday.

Markets have cast aside dollar- positive risk aversion to focus on what makes it most vulnerable - a trillion- dollar-plus US deficit and the impact of unorthodox monetary policy to boost lending.



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If the spotlight on weak dollar fundamentals intensifies, gold could find itself in the eye of a perfect storm. "The dollar/gold relationship will look prominent under two conditions: one is if the dollar is moving around a lot, and the second is if the gold price isn't moving around a lot," said Virtual Metals analyst Matthew Turner.

Bullion's link to the dollar is a well- established one, with the metal traditionally used as a hedge against weakness in the US currency.

A softer dollar also makes dollar- priced gold cheaper for holders of other currencies.

That relationship broke down early this year as both assets benefited from a flight to safety among investors.

According to Reuters data, gold in fact showed a positive correlation with the dollar of 0.5 in January, as stock market sentiment proved the overriding factor to both.

In May, however, it was back to -0.8, close to a perfect negative correlation of -1.

The fact that dollar weakness, rather than risk aversion or other factors, was behind gold's rise was also shown by the its relative stability when priced in other currencies.

The outlook for gold therefore looks largely contingent on the path of the dollar over the coming months.

"People are fearful again that we could be facing a dollar collapse, which would have severe ramifications across the board," said Calyon metals analyst Robin Bhar.

However some analysts, including Virtual Metals' Turner, believe the dollar could pause in its run lower, especially with policymakers now hinting at further interest rate cuts in Europe, which would knock the euro and limit bullion's short-term gains.

Inflation sparked by quantitative easing - under which governments inject fresh money into the financial system - plus sky-high government borrowing to meet the cost of ballots and fiscal stimulus packages could send the euro to US$1.45, analysts said.

Ashraf Laidi, chief markets strategist at CMC Markets, said he sees the euro re-testing its highs of around US$1.55/1.57 by the end of the year.

This could send gold to US$1,200- US$1,300 an ounce by the end of the third quarter, he said.

Gold is a widely used hedge against rising prices, as it is considered to hold its value while paper currencies fluctuate.

Moreover, the precious metal is likely to benefit from fears of a more widespread currency crisis, analysts say.

"Gold is going up when the dollar is weak, but none of the major currencies are standing out as looking particularly attractive at the moment," said UBS strategist John Reade.

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