Shrinking dollar and surging gold

Want a racing certainty for the coming year? Take a look at the dollar and gold... Who can say what 2008 may bring? A post-Olympics crash in China, perhaps, tipping its near-10 per cent annual rate of expansion into an historic slump.

The first annual fall in UK house prices since 1995, maybe, unwinding a chunk of the near-quadrupling of London real estate values...

In the United States, a bottom might finally be found in Florida or Californian real estate. But we'd expect Paris Hilton to win the White House with Ron Paul as her running mate before then.

Yes, the Dow Jones stock index could push higher still to new all-time highs...even measured in terms of the Euro, rather than simply counted in the fast-vanishing dollar.

But the New Year has already brought the world one new all-time high that clearly says otherwise -- and it only took one trading session for the gold market to jump 2 market and break its three-decade record of $850 per ounce.

The anti-everything-else, gold clearly signals more trouble ahead for the rest of the world's investment markets -- starting with the very value of money itself. That's the nagging doubt that drove gold prices higher every year between 2001 and 2007.

And here at BullionVault, we think it will take more than a bounce in the dollar to reverse gold's seven-year bull market, too.

We don't doubt that newly-penned gags on Jay Leno's Tonight show might turn up this year alongside a pause in the dollar's collapse.

By the end of Sept., says the latest data from the International Monetary Fund, the dollar accounted for less than 64 per cent of foreign currency reserves worldwide. That might cue the Greenback to thumb its nose at the Euro, now risen above 26 per cent of official cash reserves worldwide.

Factor in the dollar-doom cover stories from magazines including The Economist and Newsweek, and the case for a contrarian play only gets stronger. Everyone agrees the dollar looks sure to keep falling, even the policy wonks of the world's central banks! And as a very successful options trader once reminded me, the markets are always sure to do whatever it takes to screw the most people the most.

So maybe it's time for a surprise from the Greenback, now one-third cheaper than this time six years ago. Spanking the world's central bankers -- and sucker-punching private investors, now busy gearing up on the forex markets – a turnaround in the US currency might just coincide with a genuine political crisis in the 13-nation Eurozone, too.

But "with Bernanke at the Fed and Paulson at the Treasury, and a Euro that could
face some problems (a break-up, some believe) because of badly deteriorating economic conditions in Italy, Spain, Portugal, and Greece," as Marc Faber writes in the latest edition of his Gloom, Boom & Doom report, "precious metals are likely to outperform financial assets for some years to come."

Indeed, whatever comes in the Presidential race -- and no matter what happens to inflation in the cost of living, now running at multi-decade highs in Europe and China, despite their surging currencies -- the real driver of gold's seven-year bull market looks to be the New Year's one racing certainty.

Governments and central banks the world over will refuse in 2008 to protect cash savers and bond buyers. They'll cut or hold interest rates in the forlorn hope of helping debtors instead, destroying the buying power of all official money.

Yes, gold might fail to rise as a result. But that would prove a heart-stopping shock, far more surprising than the most likely "shock" -- that gold keeps on rising even if the dollar stops falling against other government currencies.

Just take a look at how the gold market got here today. The new record highs hit on 2 Jan. 2008 came for nearly everyone buying gold on the last trading day of 2007, no matter whether they bought in dollar, the euro, British pounds, Swiss francs...Canadian, Aussie or New Zealand dollars...Indian rupees or South African rand...Thai Baht or Chinese Remnimbi.

Only Japanese investors still hold a currency today worth more against gold than at some point in the past. And the irony there is so tasty, Burger King should offer it on the Whopper.

Near-zero interest rates failed to kick-start the Japanese economy for 18 years after its real-estate and financial bubbles popped. Tinkering with target rates of less than 1 per cent since 1995, the Bank of Japan still hasn't worked any magic by trying to destroy the value of the currency it prints.

Yet it's the Japanese lesson of the early 1990s that's now pushing the US Fed, Bank of England, ECB in Frankfurt and pretty much every other developed-world