'Thanks to Fed?s War on Dollar, Gold will Reach $2K an Ounce This Year'

Another impasse at the U.S. debt ceiling talks caused gold to touch new highs on Monday. Spot gold rose to a record $1,622.49 per ounce, an increase of 1.1 percent, as investors became nervous about the possibility of a U.S. rating downgrade.

"With little optimism on U.S. debt talks at the moment, the gold price acutely reflects investor nervousness that limited progress will be made before the Aug. 2 deadline ... This nervousness is in many ways justified as the threat of a U.S. ratings downgrade is very real," UBS said in a note, according to Reuters.

There are analysts who believe that irrespective of whether there will be a debt deal in the U.S. or not, gold will continue to rise higher, basically because of the residual weakness of the dollar.

After the Federal Reserve threw a hint about another round of monetary and fiscal stimulus, earlier in the month, gold picked up momentum again. Assessing the impact of the second round of Quantitative Easing (QE2) at the end of June, the Fed said if the situation warranted, it could pump more money into the system.

It assessed that the $600 billion QE 2 did not decisively help in overall economic growth and the creation of jobs. If the Fed decides to print more dollars, it could immediately erode the value of the dollar, and start a chain of events with serious consequences. Inflation will spiral, prompting oil trading countries to steer clear of the greenback.

The option of raising rates to contain inflation will not work as it did before. This is because, unlike in the past, the U.S. is not a creditor nation now.

Some analysts say that the Fed, through its Quantitative Easing policy, is waging a war on the dollar. "Thanks to Ben Bernanke's ongoing war on the dollar, all you need to do is buy gold," says Steve Christ, writing in Wealth Daily.

In 2005, gold was going at what could now be considered as a basement price of $440 an ounce. That has zoomed more than 250 percent now hit near $1600. Those bullish on gold say it will not stop anytime soon.

During Clinton-era prosperity, gold prices hit rock bottoms. The yellow metal touched the nadir of around $250 an ounce in a gradual free fall that started after the peak prices in 1980. And the early 80s looked a lot like the current financial situation.

"High inflation because of strong oil prices, Soviet intervention in Afghanistan and the impact of the Iranian revolution prompt [ed] investors to move into the metal," according to Reuters.

The next spike in prices did not start until the run-up to the Iraq invasion in 2003, which spooked markets and increased the yellow metal's safe haven value.

Right now the country is mired in a war in Afghanistan and is reeling from the trillion-dollar military adventure in Iraq, besides maintaining an expensive vigil across Middle East and other parts of the world.

In February 2009, gold rose above $1,000 an ounce. One reason behind this spike was China's aggressive buying of gold. In April that year, Beijing said it had raised its gold reserves by three-quarters since 2003!

Right now, China is on an unprecedented gold-buying spree. They are running away from the dollar like mad, and trying to diversify their foreign exchange holdings. China is billed to soon overtake India as the biggest gold consumer.

The demand-supply disequilibrium itself will propel gold's rise in the days to come. According to Luke Burgess, gold prices will "begin to parabolically rise past $2,000 by the end of 2011.” Writing in Wealth Daily, he says the long-term supply-demand picture for gold “extremely compelling.”

And he doesn’t stop even there. He says gold will easily break $4,000 per ounce, while silver could reach more than $150 per ounce.