why gold rises despite of US dolar strengthens recently?

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Short View: Gold glistens once more

By John Authers

Published: January 26 2009 18:47 | Last updated: January 26 2009 18:47

Gold is glistening once more, even though the dollar is rising. For the past two years, gold was an almost perfect inverse of the dollar, gaining whenever the US currency weakened.

This made sense, as gold is traditionally seen as a store of value. Investors would hedge against a falling dollar by buying more gold. But this meant that gold fell in the latter half of last year, in tandem with the rising dollar, despite the kind of extreme uncertainty that would normally prompt people to buy gold. The dollar rose as US investors retreated from risky investments and brought their money home. Gold fell as the dollar rose.

That relationship has ended. Gold is up 14 per cent in the past two weeks, and 34 per cent since it hit a low in October, in spite of a rising dollar.

Inflation offers a plausible explanation. Late last year there was a full-blown deflation scare (which would be bad for gold). That is diminishing a little; prices of US index-linked bonds now imply the market expects inflation to average 0.77 per cent over the next 10 years. This is still low by historical standards, but is up significantly from November, when they briefly signalled outright deflation.

It seems premature to worry about rising inflation, as strong deflationary forces are at work in the world economy. But gold’s rise may show that traders now think the deflation scare was overdone, and sensed an opportunity to profit.

All of this views gold in dollar terms, in which gold is about 25 per cent above its peak from the last great bull market in the metal in 1980. In yen terms, gold is still barely half its 1980 level – which might imply that there could be more gold demand to come from Japanese investors.

And in sterling terms, gold is double its 1980 peak – which implies either great worries about returning inflation in the UK, or an overdone collapse of confidence in the pound.

Copyright The Financial Times Limited 2009