Gold price increase 'likely to be gradual'

The price of gold may well continue to rise as the value of the dollar falls, but that rise is likely to be gradual.

According to analyst Lawrence Williams writing in Mineweb, the sharp bullion rises predicted by some are unlikely to materialize because any fall in the greenback is likely to be a managed one.

Many economists are looking at China's enormous foreign exchange reserves of 1.3 trillion, and there is speculation that the country could choose to convert some of the declining dollars into gold. Of course, this would cause the price of gold to shoot up as the yellow metal became scarcer elsewhere in the world.

However, Mr Williams notes that much of China's economic performance relies on sales to the US. Converting dollars to gold would damage the US economy and, in turn, damage China's own economy.

"Why bite the hand that feeds you?" he asks.

This premise extends to other countries that have strong economic ties with the US - "and that certainly includes most of the heavy hitters in the economic stakes which have the power to help mitigate a dollar decline".

However, the prospects for gold continue to be good because global production is slowing, with a lack of major new mining projects on the horizon.

Gold hit a two-month high in New York trading today (July 20th). Gold futures for August delivery rose by $2 to $680.20 on the New York Mercantile Exchange, Bloomberg reports.