Weak U.S. Dollar Lifts Precious Metals

NEW YORK (TheStreet) -- Demand for precious metals exchange-traded funds such as iShares COMEX Gold (IAU Quote) and iShares Silver (SLV Quote) have remained strong even as investors have taken profits in other commodities.

Some of the positions that have worked best for my momentum-based client portfolios and newsletter subscribers over the past one to two years have been gold and gold stocks, such as Market Vectors Gold Miners (GDX Quote) and Fidelity Select Gold (FSAGX Quote). Although I expect all precious metals to appreciate further over the next 12 months, I have begun to look more closely at the relative performance of platinum and silver ETFs, which have lagged those of gold until this latest bullish spurt.

One of the reasons I have advocated small positions in both the bullion and mining stocks is their potential to hold up during times of financial crises. Although gold didn't respond entirely as expected during the height of the crisis last year, gold investments have rebounded to their pre-crash levels. And whether you are a believer of inflation or deflation as the near-term course for U.S. dollar-denominated assets, there is a good chance that precious metals will hold their value, even at these elevated levels.

There are many factors that have supported the price of gold throughout the downturn and even during the latest rally, but I believe it is the weakness in the U.S. dollar and the growing expectations for higher inflation that will remain primary driving forces. As long as the dollar can depreciate further, both retail and institutional investors alike will continue to generate financial and speculative demand for precious metals, and primarily gold because of its perceived utility as a store of value. One only needs to look as far as India and China, where consumers have been encouraged to diversify away from the dollar and buy precious metals directly in place of jewelry.