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After a mini-rally by the United States dollar pulled gold off its all-time high in early December, some investors began comparing the dollar and gold prices, looking for the long anticipated surge in the US dollar. While its brief run built hopes as the dollar bested gold and the 16 top foreign currencies, the long term outlook for comparing the dollar and gold prices still favors the precious metal.

Analysts that track commodity prices and look for trends have been calling for the Dollar Index to change direction and begin climbing. While the trend appears similar to the previous two patterns, there are several economic factors that make a turn at this time unlikely.

The first factor to consider when comparing the dollar and gold prices is the current economic situation. After a year of liberal programs that have thrown billions of dollars into the economy, the financial situation has shown very little improvement. The dollar is frequently events driven, and the lack of response in the employment sector and continued closing of businesses has done nothing to encourage movement.

The long term situation doesn’t look any better when comparing the dollar and gold prices. By flooding the market with trillions in new money, the national debt soars and the dollar as a whole is significantly weakened. Weakening an already frail dollar is a dangerous proposition.

While flooding money into the market is favorable for the dollar in the short term, it weakens the structure of currency. As the deputy-governor of China’s central bank says, “When the United States has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken."

In fact, "When the United States has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the Dollar will continue to weaken." Wise words from someone who knows as China owns $798.9 billion in US Treasury debt. 

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Stewart Lawson

Senior Staff Writer - Gold-Investment.info