Gold Rush

Following up on last night's article discussing plans by China, Russia, France and Arab oil states to dump the dollar using gold as a transition point, gold hit an 18-month high this morning.

Peter Fertig, a consultant at Quantitative Commodity Research, said the final quarter was typically strong for gold, due to rising jewelry demand — a weaker than usual factor this year — and as the dollar is seasonally soft.

"That is the major driver of investment demand," he said. "The speculation, even if it has been denied, that Gulf states would like to peg oil prices to a currency basket and not the U.S. dollar alone has been a positive factor for gold, while weakening the dollar against other major currencies."

The dollar slipped sharply in Asian trade after UK newspaper the Independent said Gulf Arab states were in secret discussions to end the use of dollars in oil trading. The newspaper said the states were in talks with Russia, China, Japan and France to replace the unit with a basket of currencies.

The dollar pared losses after the report was denied by Saudi and Russian authorities, but stayed weak.

Dollar weakness, if sustained, could push gold prices to new all-time highs above $1,030.80, the peak they hit in March last year, analysts said.

"The ability of gold to climb back over $1,000 is, in our opinion, impressive," HSBC analyst Jim Steel said in a note. "If the dollar remains subject to gradual erosion and commodity prices remain firm.... then gold is likely to remain well-bid and may challenge all-time highs."

Somebody's surely betting on the dollar to lose and lose big. Keep an eye on the prices of both gold and oil. They are sending warning signs that the dollar is on the way out.