Weakening Dollar and High Oil Prices Fuel Gold (Price) Rush

The state of the economy, with rapidly skyrocketing inflation being a major concern, has come as a boon for the gold industry, as prices for the precious metal continued to skyrocket for the second day running. The gold run continued from where it left off Tuesday, after the $15 recovery and hit $920 per ounce, Wednesday.

Complementing the gold rush all the way, though, was a corresponding jump in oil prices. New York saw oil prices soaring to another high, hitting $129.75 per barrel. This was enough to push investors into picking up gold bullion as an effective strategy to countermand the ever-increasing cost of fuel.

Speaking about the current trend, TheBullionDesk.com’s James Moore said, “After yesterday's rally dips are likely to be viewed as buying opportunities as energy price gains increase inflationary pressure, while the interest rate differential between Europe and the US keeps the dollar under pressure.”

One of the primary factors fuelling the rising gold prices is the weakening US Dollar. With the dollar slowly going down in value, gold becomes the automatic option to the strongest form of foreign currency reserves.

Add to the weakening dollar, the steadily increasing oil prices and you have the perfect scenario for gold prices to gain ascendancy. Says Scotia Mocatta’s Robert Lockwood, “The combination of a weak U.S. dollar and strong oil prices is clearly working in the metal's favor.”

According to analysts, the escalation in oil prices is one reason for the dollar losing its value and going weak. That the dollar is weakening is apparent from the fact that the Federal Reserve has been working really hard, cutting down on interest rates, to try and prop up the U.S. economy. The European Central Bank, on the other hand, is all set to avoid having to bring down its interest rates.

According to currency analysts BNP Paribas, “The correlation between oil and euro-dollar has steadily increased over recent years with the cheerleaders of the ECB's inflation dogmatic approach providing the intellectual reasoning for this correlation.”

One way of strengthening the dollar and checking the rising gold prices could be possibly for the Fed to put an end to its continuous slashing of interest rates as the threat of inflation looms large. If this happens, the outcome could possibly be a strengthening of the dollar.

There is another point to consider. The escalation in gold prices has also brought about a reduction in the metal’s demand among physical buyers of the metal. A Tuesday morning report from the World Gold Council showed a 16 per cent slump in demand during the first quarter of 2008, compared to the first quarter of 2007.

The main reason for the drop in demand has been the escalation in prices, a phenomenon that has restricted the purchase of the metal in its various forms – jewelry, coins, and bars.