NEW YORK (Commodity Online) Last week, the sovereign debt crisis caused daily swings in gold prices and it remains vulnerable to more bad news for Greece or signs that one or another European Union member is following Greece down the road to insolvency, according to Jeffrey Nichols, Senior Economic Advisor to Rosland Capital and senior precious metals economist.

Jeff Nichols said that gold should benefit from euro problems and its continuing loss of status as a dollar alternative. In fact, with Europe facing a chronic sovereign debt problem, the euro is itself a shrinking yardstick, hardly a stable unit of value against which to measure the dollar.

The fact that the dollar is up about seven percent against the euro so far this year is a false picture of strength. "In our view, those who buy or sell gold based on the dollar/euro exchange rate are looking at a faulty indicator. Europeans who are losing faith in their currency's value have pushed the euro-denominated price of gold to record highs. As the euro's long-term decline becomes more apparent to speculators and traders in these markets, gold's inverse correlation to the dollar/euro exchange rate will continue to erode – and gold's price will move to new all-time highs against both currencies."

Looking at the dollar's performance against other currencies demonstrates its true weakness. So far this year the U.S. currency has lost about five percent against the Canadian dollar and 6.9 percent against the Mexican peso. Together these two countries account for considerably more U.S trade than does the European Union. Yet the greenback's decline against these other North American currencies seems to be overlooked.

Other world currencies where the dollar has lost value this year and how far in percentage terms include economies that are growing and from which we import many goods and services:

India (4.5%), Indonesia (4.4%), South Korea (4.9%), Malaysia (6.8%), Philippines (4.7%), Singapore (2.5%), Taiwan (2.0%), Thailand (3.4%), Russia (3.9%), Australia (3.1%), Colombia (4.5%), Guatemala (4.0%), Costa Rica (8.5%).

To be sure, there is an even longer list of countries against whose currencies the dollar has appreciated – but many of these are poorly managed, developing countries, or the economic basket cases of the world, Jeff Nichols said.

Rising foreign currencies – particularly in the gold-friendly Asian zone – benefit the price of gold in several ways:

First, stronger currencies make gold cheaper and more affordable to investors and jewelry buyers in those countries, boosting demand. Stronger currencies of rapidly growing Asian economies makes their raw-materials imports less expensive, further boosting consumption of everything from oil to steel and aluminum to soy beans and rice – raising the dollar price of many commodities in the process.

Stronger foreign currencies make America's imports of autos, toys, blue jeans sneakers, and thousands of other products manufactured in the Asian region, Canada, Mexico and other strong-currency countries more expensive, contributing to higher consumer price inflation in the United States.

The U.S. dollar is an inherently weak currency – one that's losing real purchasing power, thanks to America's reflationary monetary policy, huge current Federal deficits and massive accumulated public-sector debt. It is only a matter of time before gold more accurately reflects the continuing decline of the dollar.

Inflation concerns
A close look at the U.S. producer price index for March, released last Tuesday, suggests that reported consumer prices could begin rising more quickly in the next few months – and this could give gold a boost on its long-term upward march.

Year-over-year producer price inflation rose to 6.0 percent in March from February's 4.4 percent annual rate. Pointing to more price pressure in the pipeline, the PPI All Commodities Index rose 9.0 percent in March from a year earlier with 13 of 15 major commodity price indices up from the prior month. A look at commodity futures and physical prices confirms that manufacturers are already facing much higher prices for a wide range of raw materials including oil and other energy products, to steel, lumber and other building products, to many foods and agricultural commodities.

Policymakers at the Fed and other inflation "doves" believe that low capacity utilization in the U.S. economy – so-called "slack" – will keep U.S. price inflation well under control. What they don't recognize is that in a global economy, with strong demand overseas, with commodity and raw materials prices rising everywhere, and with a declining dollar, higher inflation at home is already in the cards.

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