BUSTED DOLLAR, BOOMING GOLD?

A report in today's morning news paper report screams, “Gold futures seen hitting record" and one cannot help but raise the eyebrows in bewilderment and wonder how far will this yellow metal go? It is already become out-of-reach for most, how much more? The report states that gold futures are likely to extend gains to hit another record high, tracking strong overseas markets. The only dampener, which will keep some check on the price is the strong rupee. Rupee and gold prices? Well, the rupee determines the landed cost of the yellow metal, which is quoted in dollars. One cannot help but wonder - what exactly is driving up the gold prices? On one hand, we have reports stating that due to the high prices, India's September gold imports fell an annual 17.9% to 32.6 tonnes. This buying was only on account of the festivals, or else, the imports would have been much lower. Exporters to India say that demand has slowed since gold broke above $1,300. And then on the other hand, we have reports suggesting, based on the futures market, prices are set to scale up further. So what exactly is driving the gold prices today? The real drama is actually happening on a macro level, which in turn, is affecting the prices on the micro level. By macro level, we mean, countries buying gold as a part of their reserve. And this in turn affects the micro, which is at the retail level. So what is happening right now is that countries are slowly buying into gold as a more stable reserve, given the run on the US dollar.On the international arena, the dollar is on very thin ice. There are reports put out by international agencies, stating that the US dollar is losing status as the world's reserve currency. The dollar is expected to drop the most against emerging countries, as these economies will grow, while US will struggle. To tide over the collapse two years ago, US printed massiveamounts of dollars and today there is so much liquidity that it hasreduced the appetite for the dollar. Another reason for the dollar to weaken is the gargantuan amount of fiscal deficit the US is sitting on. As per data on the US Govt website, U.S. budget deficit reached a record $1.27 trillion for the first 10 months of the fiscal year and broke a monthly high for July. Warren Buffett has stated that the deficit will rise to 13% of the GDP this fiscal, while net debt will increase to 56% of GDP. There is no more remedial action left with US to pump up its currency and if it allows the tide to take its course, then the dollar is up for some real hard bumps. The reserves composition of most countries around the world is typically 60-65% in US dollars, 15 to 20% in Euro and 5 to 7% in Japanese Yen and some in gold. Given the expected run on the dollar, China and Russia have already called for a new global currency to replace the dollar as the dominant place to store reserves. Can one imagine what will happen to the dollar if each country starts selling even 5% of their dollar reserve? Now the direct co-relation to gold. When countries sell their dollar, where else do they park their funds? The Euro is not exactly very reassuring, Yen faces its own set of weak economic growth issues in Japan and Chinese Yuan, is a no-no due to existing capital controls there. The Sterling has all but lost out on being a part of the reserves. So with no safer haven, naturally, all are now turning to gold. China, at the end of March 2010, held gold to the tune of 1,054 metric tons, which is just 1.5% of China's reserves of over $2 trillion. With it holding over 75% of its reserves in US currency, naturally, it is worried today and wants to shift to a more stable reserve, which it currently finds in gold. So the price rise we see here in India today is more because of these changing dynamics on the international arena. And here we thought that Indian retail buying can change the world prices? If there are reports saying gold will breach $2000 an ounce mark soon, it seems plausible. Actually, any mark seems possible, sky is the limit!