Gold prices soared this week to new record highs against the dollar at an amazing $914 before falling back to current levels just above $900.  The strong surge in the last week left the previous record against the dollar in its wake.  The new mark established a new high since gold first floated against the dollar in 1971.

The gold spike has coincided with the continued weakening of the dollar, as cautious investors continue moving into the safe money bet with gold.  With financial markets firmly expecting at least a .5 and hoping for a .75 point cut in the Fed fund rate, investors are betting against the dollar based on its falling interest rate differential, along with continue housing and mortgage problems.

As investors continue to avoid the dollar, the rise in gold will perpetuate.  James Turk, founder of goldmoney.com, and a leading financial analyst believes gold is on the way to an astounding $8,000-$10,000 price point within five years.  While this sounds impractical, some point to the move in gasoline prices as a comparison of a valuable resource catching up to years of inflation.  Turk also proposes that a dollar crash is on the horizon and will be a major part of this rising gold to dollar equation.

What makes gold such an interesting resource is that it is a unique raw material valued as a financial holding reserve.  While crude oil, diamonds, and similar resources are used for development of products, gold holds much of its value due to its universal monetary use.  Even though gold is a valued treasure for its jewelry use, speculators tend to drive significant moves in market price.

In addition to gold investors seeing gains against the dollar, many foreign currencies are still seeing huge gains in exchange rates against the dollar.  Many economists believe the current dollar-gold exchange is more a factor of a weaker dollar than a surge in gold prices.  The Euro, the Pound, and many other major currencies have held fairly steady against the gold.  This suggests the dollar is the factor as it has fallen against gold and these currencies.

South Africa, a strong gold producer has been embracing the gold surge against the dollar.  Other countries with high gold production are the ones benefiting the most from the weak dollar.  These countries are able to take the strength of their currencies and the strong speculative interest in their gold, to diversify their investments to include cheap buys in the US.

Consumer confidence has begun to slide in the United States, something that was bound to happen with housing and mortgage struggles combined with declining retail sales.  As the dollar remains weak against global currencies, some are concerned about the viability of the US in the world economic landscape. 

The US has always maintained a large proportion of reserves in gold, generally around 70% of its total portfolio.  This has helped provide security in tough times as gold remains a strong world money asset.  Its purpose as a reserve is to protect against drastic changes in paper money value.  Gold has been reliable and consistent in its world demand.  Currencies, however, have at times been worth little more than the paper they are printed on.

Some financial analysts have in the past stated that high gold to dollar means an ideal time to buy the dollar.  They have theorized that what goes up must come down.  Historically, gold to dollar prices have shown a somewhat controlled trading pattern, with clear steady up and down moves. 

This up move seems different, however, to many.  The US economy is really struggling with a credit crunch.  Consumers are getting nervous, and retail sales are sluggish.  Perhaps this time around, higher gold will be followed by even higher gold.  With the extreme lack of resistance put up by prior record highs, there seems to be little in the market to slow the gold to dollar climb.

This continued climb in gold coupled with the weaker dollar means many Americans will find it harder to get as much bang for their buck in the marketplace.  It also means many speculators will continue to turn their money into gold.  For now, it definitely carries a much brighter shine.

Market Recap

US stocks surged Monday on exceptionally strong fourth quarter profits from IBM, which inspired investors to see hope in the financial side of the market.  Consumer spending showed a stronger slowdown, which is disconcerting for current economic and business developments.  On the day, the Dow closed at 12,778 (+171.85, 1.36%), and the NASDAQ finished up 38 points to close at 2478.  Tuesday was quite the opposite for US equities as the market was hammered.  The Dow dropped 277, the NASDAQ 60, and the S & P 35 on the day.  The market was unhappy with Intel’s fourth quarter report.  New layoffs were announced in the mortgage market.  Citi was probably the biggest loser on the day after announcing $10 billion in losses and a dividend cut.  The financial markets are very concerned with credit and hopes are high for a .75 point cut in the Fed rate on January 30.

Neil Kokemuller
Tuesday, January 15, 2008
10:20 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

Please note:  The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments.