Yo Yo Week for Gold Bullion

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With the US dollar showing signs of strength and oil moving up and down as well, gold has tended to follow the direction suggested by the strengths and weaknesses of these other key influences, rather than plough its own furrow on fundamentals alone.

Investors in gold have been having a nerve wracking ride of late with several false dawns promising a return to the high $900s - and even bringing out predictions from some analysts of a rapid return to the $1,000 level seen earlier in the year. But, with the US dollar showing signs of strength and oil moving up and down as well, gold has tended to follow the direction suggested by the strengths and weaknesses of these other key influences, rather than plough its own furrow on fundamentals alone.

Gold is primarily looked at by the broader investment market, rather than by the strong gold bug element, as providing a hedge against inflation and against major political turmoil and unrest. Recent statements by Ben Bernanke, the Chairman of Governors of the US Federal Reserve, have suggested that inflation could be becoming a problem and has hinted that the recent spate of cuts in US interest rates to help stimulate the economy may be at an end, and that interest rate rises may be on the horizon to clamp down on inflation due to higher food and commodity prices - not least oil. This, in turn, has seen a strengthening of the value of the dollar against other currencies (although not a very certain one as occasional bouts of poor economic data tend to reverse the perceived sentiment) and at times when the dollar strengthens and oil falls back from its peaks, the gold price tends downwards.

That is undoubtedly what has occurred over the past few days with a briefly weak dollar and surging oil pulling gold back above the $900 level, only to see it tumble back to the $860s this morning amid fears that it could fall even lower.

But, consider the inflation scenario. The high food, metal commodity and oil prices are filtering through and it is not only the US which may be considering interest rate rises to try and combat inflationary trends, but also the European Central Bank and the Bank of England among others, which have also intimated they may be set on the interest rate rise route. This may mean, should this all come about, that the relative strength of the US dollar engendered by an interest rate increase in the US may be negated by similar, or bigger, interest rate rises elsewhere.

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