A chart comparing the US Dollar and gold:

The US Dollar and Gold have been heading in opposite directions for the last five years or so. The question now is “Will the elastic continue to stretch or will it snap?

The chart above clearly indicates just how the two have separated.

We will look at the US Dollar first.

The dollar is coming under more pressure as it weakens against a basket of currencies, which include the British Pound. Last week Britain reported an increase in inflation to 3.1%, which is above the government’s guidelines of 2%. This increase will prompt the Bank of England to raise the base rate in order to combat inflation. We think that there will be more then one rise and the first could be as high as half a percentage point. The US Dollar has already dropped to the 2 Dollars for 1 British Pound level and now looks like taking another battering as the pound strengthens. There are also those in the Euro Zone calling for an increase in rates as the German economy powers ahead. Not everyone in Europe wants to see this implemented as for instance the French have unemployment running at 8% and they would prefer a boost to their economy. However if the rates do up then the Euro will also be putting pressure on the Dollar.

The US Dollar Chart:

Lets assume that the Dollar breaks through the ‘80’ level to say ‘78’ for argument sake, from its current level of ’81.5’. It doesn’t sound like too much of a drop if you say it quickly. However it represents a fall of 4.2%. Now if you were not you, but a Finance Minister of a foreign government holding a mountain of Dollars like the Chinese are holding, how do you feel? What are you going to report to your fellow Ministers? Your countries reserves have just lost 4.2% of a trillion Dollars! Do you intend to continue holding this currency? When will you say enough is enough? In our opinion that day has probably past and we suggest to you that more and more governments will be planning to reduce their exposure to the Dollar thus stretching the elastic even further and maybe to snapping point.

We will now take a quick look at the chart for Gold, which we are sure that you are all familiar with. Gold has made steady progress despite the knockers who have contrived to push it down.

The Gold Chart:

Gold today is at the $690.00 level, poised for an assault on $700.00 and in our opinion a run at $1000.00 this year. The decline of the Dollar will add to Gold’s acceleration to a new all time high.