Price of Gold by SilbermanThe US Dollar has been moving relentlessly lower since the beginning of 2006. The market value of Gold however has not made a new high since May 2006. Does this alone dispel the fact that Gold and the US Dollar are inversely correlated?
Some theories:
1)Gold traders don't believe the drop in the dollar is real but merely temporary (doubtful).
2)Gold is being manipulated and prevented from breaking out to new highs by the powers that be (plausible).
3)There is a time lag before a falling dollar impacts the current value of Gold (most likely).
I suspect the gold market may be subject to manipulation*, but in the long term, this manipulation, as with all manipulations is doomed to fail. Therefore, from the three reasons above I think the last is the most credible and important.
The Dollar has been falling yes, but against what? Against other paper currencies. The pound to dollar conversion rate is at historic highs at over $2 to £1 and euro dollar conversion rates are also at historic highs! This means that confidence in paper currencies has remained strong even whilst the world's defacto reserve currency (the greenback) has faltered. This optimism has been achieved by suppressing inflation expectations, a liquidity deluge which has kept credit spreads low (masking risk) and equity markets floating into the stratosphere. But most importantly, a deluge of liquidity has kept house prices rising and consumers in the money.
These conditions may be about to change. The falling dollar is finally pushing interest rates higher and credit spreads wider, exposing marginal debt built up over the years. Further dollar weakness will most likely be of the offensive kind causing a shift in the price of risk as opposed to moving from one fiat currency to another. That's when the current value of gold will reflect the underlying fundamentals and it may very well be upon us right now!