Why gold could hit $1,500 on back of dollar’s decline

The dollar's decline has paused and the record-setting ascent in the value of gold has slowed but now the political pressure is mounting on President Obama to reassure global investors that the US remains a sound financial bet.

Republican politicians are looking to make political hay from the currency's slide, depicting it as proof of declining US power. Sarah Palin, the beauty queen turned vice-presidential candidate turned bestselling memoirist, is using it to promote the case for increased domestic oil drilling.

Not to worry, says Norm Ornstein, a veteran analyst at the American Enterprise Institute. "The dollar has always been a testosterone issue among America’s political classes."

But gyrations in the currency markets and the strengthening value of gold - Barclays Capital says it could hit $1,500 an ounce - present a conflicted picture. Gold's gain, it appears, is the dollar’s loss. And however forcefully politicians and central bankers say they want a strong reserve currency, there's precious little they can do about the dollar's slide or to explain with rational certainty exactly why it's been falling.

One view is that gold, which currently trades at just under $1,050 an ounce, has become a currency of its own - better in fact than any currency because you can't print more of it.

To others, gold is simply over-priced and out-of-control. "A mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices," Julian Jessop, economist at Capital Economics, told the BBC.

Yet there is widespread belief among gold investors that its value will continue to rise even if government and economist forecasts are correct that the recession is lifting.

Gold may have risen substantially but it is not close to the $850/oz it hit in January 1980 - that figure equates to $2,300/oz today, adjusted for inflation. Still it has more than tripled in value over the past eight years as the dollar has tumbled 60 per cent versus the euro.

"Gold has been pushing higher because it's no longer just a hedge against commodity inflation, it’s also a hedge against a change in world monetary standards,” said Phillip Gotthelf, president of Equidex Brokerage.

But there are also signs the surge in the value of gold is attributable to speculative investors hedging against inflation fears.

Traders say demand for the precious metal is not slowing despite a slowdown in demand for jewellery in India, Turkey, the United Arab Emirates and Italy. Indeed, a Dublin-based brokerage, GoldCore, said in a guidance note that gold could go to $2,000 - but it didn't say when.

And that could mean an even weaker dollar and more problems for the US. Easier to export, yes, but overseas investors will be more wary of buying treasury bonds the US needs to sell to finance a deficit that will run to $1.6tr this year alone.

And, of course, it gives Sarah Palin and the Republicans more political ammunition to hurt Obama. Though while he admits there may be room for debate, Norm Ornstein says dismissively: "Sarah Palin is not qualified to participate."