Collapsing US Dollar Driving Gold Prices

The continuing weakness and collapse of the U.S. dollar is driving gold prices as much as anything else, as in terms of the U.S. dollar, gold broke an all time record again, reaching $1,500 a troy ounce, as investors ignore the plunging jewelry demand from India and other nations and look toward safety and an inflation hedge.

To get a grasp of how weak the U.S dollar is, in other currencies gold is far from breaking records, as in being measured by the yen it's 15 percent below their all time record in gold, and the Australian dollar is even stronger, being 30 percent away from their all-time high for gold prices as measured by their currency. Even against sterling gold is 6 percent away from record past highs.

Again, gold is being moved by the increasing lack of faith in the U.S. dollar, along with complete uncertainty on the condition of the economy, as mixed signals and postive thinking reports from the government continue to hide the real condition of the global and U.S. economy, which is probably much worse than being reported.

The response to the U.S. dollar shows investors believe this completely.

U.S. Dollar Still Under Pressure

As some foreign currencies respond to their own pressures and result in raising of interest rates, the decision by the Federal Reserve to hold its rates down will continue to put downward pressure on the collapsing U.S. dollar, as the Fed holds to its loose monetary policy.

Other growing factors of concern for the dollar are the increasing number of countries calling for either a new reserve currency, basket of reserve currencies, or to trade in targeted sectors like oil not using the dollar as the currency used for trade.

That will also continue pushing the price of gold up as investors migrate to the yellow metal to hedge against the inevitable inflation coming, and which some say is largely understated by the U.S. government.

U.S. Dollar: Haven No More?

The idea that refuses to die is that the strength of the U.S. dollar over the last several months has been because investors are seeking it as a haven. I think that couldn't be a more wrong assessment of the reality happening.

What has happened is the shortage of access to cash put hedge funds and companies into positions of forced liquidation, which made them sell off their gold and other commodity positions in order to temporarily halt the bleeding and get some access to cash.

It was never a trust in the US dollar that made that happen, but the absolute need of cash that drove the actions.

The ICE's Dollar Index, which tracks the U.S. dollar against the yen, euro, British pound, Swiss franc, Canadian dollar and the Swedish krona, fell today as cash becomes more readily available, and Americans start to buy up available homes that have been abandoned. People feel safer putting their dollars there than in the greenback itself.

Pending home resales have risen by 6.3 percent to 87.7, the first growth since August 2008. In November pending home resales stood at 82.5.

As far as a haven of safety for investors, we'll see gold take up the usual role, as forced liquidation unwinds and investors put their money into what performs well in difficult economic times.

As I mentioned, investment funds and large companies had to sell off their gold in order to raise cash, that is why gold performed in an abnormal way. It's also why some of the projections of the collapse of the U.S. dollar have been put on hold for a period of time. Even so, it will collapse, along with the bond market collapse. It's only a matter of when, not if.

What all of this says about the U.S. dollar, is it's immediate and long term future is connected to the sentiment of people and their economic concerns. We've seen gold start to rise, as expected, because fear and concerns over the health of the economy are pushing people to invest in gold as the real safety outlet.

Gold will be the real haven going forward, not the U.S. dollar, which never can or should be. Caution is ruling the day, and it will for some time. That means gold will surge in 2009, while the U.S. dollar continues to fall.

The question must be put forth on why the financial press, especially in the U.S. continues to make it look like the U.S. dollar has some type of fundamental that makes it a place of safety. Everything that can happen to make the dollar weak is the underlying reality, not the opposite.

So the idea that it is a haven is bizarre at minimum, and reckless at best, as far as making it look like people should be investing in the dollar rather than running from it as fast as they can.

Against every currency the greenback has fallen today in the ICE Dollar Index, dropping against the yen, euro, British pound, Swiss franc, Canadian dollar and the Swedish krona by mid-afternoon.

In other dollar-related news, the Federal Reserve announced it would extend its currency swaps with 13 other central banks through October 30. That extends the currency swaps from the end of April.

Now that the artificial propping up of the dollar has come to an end with cash and credit flowing stronger, the days of the U.S. dollar being considered a haven or place of safety are over. It never was that, but people misinterpreted, and continue to misinterpret the period of forced liquidation which propped up the dollar because of the sell off of dollar denominated commodities.