Gold up, dollar up: what does that tell you?

For the past couple of years the fall of the US dollar has been matched almost exactly by the advance in the gold price which has mirrored the devaluation of the US dollar against the euro.

But in the past few weeks this umbilical cord appears to have broken down. The US dollar has advanced to $1.21 to the euro from just below $1.25 and gold has pivoted upwards from an initial decline to $413 an ounce to $427 an ounce.

If this new relationship holds true then we could well see the yellow metal advancing back to the $455-an-ounce highs of late last year, and possibly onwards and upwards to the $500 barrier suggested by gold bugs. Yet at the same time the US dollar could continue to rally against the euro, or even begin to fall in value again.

The interesting point is that the euro-gold price relationship seems to be over. Some would argue that this has been the main factor holding gold back from sharing in the recent commodity price rally to a full extent.

For although gold has rallied in price over the past three years, the price of a barrel of oil in terms of gold has risen from 12 to eight barrels per ounce. Indeed, by comparison to many other commodities gold has significantly underperformed.

Thus we could well imagine that gold will now have a price upturn to regain its position relative to other commodities at least. Other factors are also very supportive of the outlook for gold.

The US trade and budget deficits continue to weigh heavily on the long-term stability of the global economy. Federal Reserve Chairman Alan Greenspan offered some words of comfort to global markets this week.

But this is the same man who said that markets had seldom looked better in late 1972 just before US capital markets entered their worst-ever two years of 1973 and 1974.

Indeed, there are very few gloomy commentators left in public at least in the US these days. Most have been too wrong for too long, and have thus fallen silent. However, history suggests that this is precisely the moment to expect the worst to happen!

The US economy is not in a sound condition. It is $24 trillion in debt, and still spending hard. Gold is the ultimate safe haven, arguably even safer than US treasury bonds, and that is another very good reason for gold prices to be rising.

For in a financial crash there would be very few assets that would escape unscathed, and indeed rally on chaos. Gold is the one sure bet against a global financial crash, and whether or not it actually happens, that is becoming more and more of a worry to investors, who will therefore buy more and more gold.

Hence the end to the euro-gold price relationship probably signals an important breakout in the gold price which will now rise to reflect recent general commodity price rises and significant caution in the investment community about the true global economic outlook.