Gold rallies on the U.S. dollar's plunge.

09/09/2009 12:42 pm EST


Jim Jubak

Founder and Editor,

Gold is making another run at breaking above and staying above $1000 an ounce. And I think this time the price is likely to stick.

Even though gold is up 13% in 2009, I think the precious metal could tack on another 10% before it takes a breather.

Gold has tried to breach the $1000 an ounce level three times before in 2009. Each time it has fallen back rather than breaking through the high spot price of $1,032.70 set in March 2008.

At first glance it seems odd that gold would set a new record price now. After all the financial panic that followed in the wake of the bankruptcy of Lehman Brothers is long past and investors aren’t desperate to find a safe haven.

All that’s true, and oddly enough it’s the ebbing of the financial panic that is now driving gold higher. Investors are willing to take on a little more risk right now and to bet that economies in Asia and parts of Europe are going to recover faster than the U.S. economy. That means selling assets like U.S. Treasuries that are denominated in dollars and buying overseas stocks and bonds that sell in other currencies.

This renewed appetite for risk has punished the U.S. dollar. On September 8 the dollar fell another 1.1% to its lowest price against the euro since September 2008. In fact, the U.S. currency fell against the euro, the yen, the pound, the Swedish krona, the Swiss franc, and the Canadian dollar that day.

Currency traders believe that the dollar has further to fall, since it has now broken through what were major support levels that had held for more than a year. The euro, which closed at $1.4499 on September 8, could, traders say, hit $1.50 by the end of 2009.

What’s bad for the U.S. dollar is good for gold since traders and investors see gold as a steady reservoir of value when the dollar drops. They buy gold to protect the value of their portfolios against a falling U.S. currency and to reap trading profits from the appreciation of the metal when the dollar is dropping.  

A continued decline in the dollar would keep gold prices rising for the rest of 2009 even if the global financial system returns to something like normalcy.
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