Will Dollar Revival and Gold Price Decline Be Short-Lived?

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If the perception that things are getting better continues, particularly in the US - and some economic indicators are already less negative than before - then the dollar decline may be halted, which in turn may stop gold price appreciation in its tracks. But anything which dents this sentiment, however briefly, like serious problems for another major bank, could rapidly send the position into reverse and see another gold price surge.

With the US dollar possibly heading for its best performing month since November 2005, should the market be re-assessed? Is is this a case of dollar strength, or perhaps of weakness in some of the other currencies against which dollar value is measured? Whatever the answer, the apparently slightly stronger dollar has taken its toll on the gold price with the yellow metal well back from its March peaks - and according to some analysts it could still go lower.

So what has changed? Perception mostly. There is a feeling within the investment community that maybe the worst of the credit crunch crisis is behind us, and why it may not quite be onwards and upwards from here on, as there are bound to be further shocks to shake market complacency, stock indices are beginning to recover, and with this the safe haven status of gold as an investment is becoming less attractive...

So what next? If the perception that things are getting better continues, particularly in the US - and some economic indicators are already less negative than before - then the dollar decline may be halted, which in turn may stop gold price appreciation in its tracks. But anything which dents this sentiment, however briefly, like serious problems for another major bank, could rapidly send the position into reverse and see another gold price surge. . .Currently eyes are probably on the US Federal Reserve and Ben Bernanke to see if the interest rate cuts will continue. If they don't and the dollar remains at current levels, or even rises, against the basket of currencies, then further gold price weakness could be seen, although one suspects that at this time further downside is pretty limited. But it will probably take a serious economic shock to move gold back up to anywhere near $1000 again in the near future. But as global gold production stagnates and falls, as at present, the longer term outlook for gold still has to remain positive.

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