• Home
• /
• Business

Weakening dollar seen to fuel further gold price rally

DUBAI - The sustained weakness of the US currency has seen the dollar gold price reaching levels not seen since late 1988, and market analysts now expect further price increases this year.

According to forecasts, a continued rally in the dollar price of gold this year would be mainly due to expectations that the greenback will weaken further. Forecasts of average prices of $440-450 are not uncommon with peak prices expected to be higher.

The year 2003 saw a continuation of the upward movement in the dollar gold price - and 2004 has started with it smashing past the 1996 peak to reach a 15 year high.

"The rise last year was driven to a greater extent than in 2001-02 by dollar weakness, gold always being seen as a dollar hedge," says Moaz Barakat, Managing Director of World Gold Council, Middle East. "However, in euro terms, the gold price was flat. While the average gold price in dollar rose by 17.3 per cent in 2003 - from $309.68 in 2002 to $363.32 in 2003, in Euro gold price dropped 2.1 per cent - from 328.16 to 321.35. >From the beginning of 2003 to end 2003, almost the same trend was discernible. Dollar gold price shot by 21.07 per cent, from $343.8 to $416.25 as against a 0.97 increase in Euro price - from 329.41 Euro to 332.6 Euro.

"Gold price in 2003 - in both dollars and euros -rose strongly in the beginning due to political worries as the possibility of an Iraq invasion grew. Once it became clear that invasion was imminent - and once it became clear that there would be a US-led victory - the price fell back. Movements in the dollar price have since reflected primarily movements in the dollar with a rise in August-September also reflecting resilience in demand, the growing troubles of the Iraq occupation and increasing interest from hedge funds and certain other institutional investors in holding gold. The euro gold price has been less volatile," Barakat pointed out.

Barakat cited several reasons for the rise in the gold price during the past few years.

The effective exchange rate for the dollar - a measure of the greenback's strength or weakness against a basket of currencies - had been on a downward trend. "This itself would normally result in the dollar price of any internationally traded good rising but in addition gold is seen as a dollar hedge with a fall in the dollar tending, other things being equal, to produce a rise in the price of gold and vice versa."

A further reason for the rise in the gold price over the last few years has been the fall in most equity markets since early 2000.

Last year saw a recovery in many equity markets but there are concerns that this is merely an interruption to a longer-term bear market in most western markets.

Commodity prices generally are enjoying a boom, in part due to the falling dollar since they are mainly priced in dollars, but also due to the surge in Chinese manufacturing production and China's resulting heavy demand for metals.

This rise in commodities generally is also helping the rise in the gold price.