As the Dollar Dims, Gold's Luster Grows

Recent comments by Treasury Secretary John Snow and Fed Chairman Alan Greenspan, along with Fed governor Ben Bernanke's "printing press" speech last November, suggest a concerted effort by U.S. officials to jawbone the dollar lower, and their readiness to take action to that end, if necessary.

Such comments seem to be having their desired effect. The U.S. Dollar Index is down 12% since its recent peak in early December and by 22% since January 2002. More dramatically, the euro is up more than 35% since January 2002 and by 11% since mid-March.

Donald Coxe, chairman and chief strategist at Harris Investment Management in Chicago, observed the Dollar Index has been artificially held aloft by the Bank of Japan's efforts to weaken the yen vs. the dollar. That China's renminbi (yuan) is pegged to the dollar is another restraint to the dollar's fall. "Asians have to keep buying dollars" to offset their trade gaps with the U.S., he said, noting the Chinese bought $97 billion of Treasuries last year and have remained strong buyers in 2003.

Additionally, investors in both China and Japan have been big buyers of gold, helping boost the metal's price. To some bulls, this physical demand for the metal at a time of diminishing mine supply and higher environmental obstacles to new exploration overrides currency considerations in gold's rise.

Meanwhile, the dollar's fall vs. the euro has undermined the appeal of gold to European investors -- or at least diminished their returns from gold, which is priced in dollars.

Conversely, buying gold is an "easy way for Americans to exit from the dollar," Coxe said, suggesting American institutions holding eurodollars -- euros sold here in the local currency -- who've "taken a bath" in those positions are the most likely candidates. Retail investors wary of the stock market and facing diminished yields from money market funds and Treasuries also have sought a haven in gold.