"PERFECT GOLDEN STORM" » Decline of the U.S. Dollar

Decline of the U.S. Dollar

The world price of gold, like the world price of oil, is expressed in US Dollars. Therefore when the value of the dollar declines the price of gold (and oil) increases. The price of gold also generally trends up when buyers and sellers of gold believe that the value of the dollar is likely to decline in the future. From the end of 2001 to January 2004 the dollar fell 30% percent against the euro and 19% against the yen. There is widespread belief among economists, investors, and others that over the next several years, with ups and downs, the dollar will continue its downward trend. (Gold industry executives also expect the dollar to decline, and some mining companies are therefore withholding a portion of their production from the market, to sell at a later time, when they expect the price of gold to be higher. Within limits, this tends to be a self-fulfilling prophecy; withholding gold drives the price up.)

The following factors contribute to the belief that the value of the dollar will continue to decline. Click on a link to read about each area:

• Huge, growing federal deficit
• Huge, growing trade deficit
• Dependency on foreign financing

Bottom line: The US national debt and trade deficit are likely to continue to increase, putting downward pressure on the US dollar. As the dollar declines, the price of gold rises. A weaker dollar also drives the price of gold upward by threatening global stability and the profitability of alternative investments.

Question: Given the decline of the dollar, rather than invest in gold, should you just buy euros or yen? - CLICK HERE TO READ OUR ANSWER

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