Gold Soars on Weak Dollar

NEW YORK (TheStreet) -- As gold rises to its highest levels since March of 2008, many think it will remain at elevated prices, and for good reason.

Traditionally, investors turn to gold to hedge against inflation and when inflationary fears are high, the price of gold rises. However, this doesn't seem to be the case with the most recent surge in gold prices. Investors are still buying government debt, as indicated by the yields of 10-year Treasury notes. Also, other factors have fueled the hard asset's uptrend.

The main reason gold has surged is due to the weakness of the U.S. dollar against other currencies. Last week, the U.S. Dollar Index fell to the lowest level in a year. This has encouraged investors to borrow greenbacks at record low interest rates and buy assets in countries offering yields as much as 8.1 percentage points higher than U.S. deposit rates.

Additionally, gold is traded in the world markets using a dollar-denominated currency, so as the dollar remains weak, gold will remain attractive to foreign investors, who will continue to gobble it up.

The fundamentals of the dollar continue to remain weak. From an economic perspective, the overall U.S. economy is driven by consumer spending, which will remain problematic until unemployment starts declining.

Although the most recent data suggest that retail sales were up and consumers are spending, some believe that the numbers can't really do anything but go up and the trend can not be sustained until the labor markets strengthen. For these reasons, in the near future, it appears the weakened dollar will cause gold to remain at elevated levels.