Dollar losing ground to gold

Although the dollar had provided the chief store of value for governments since the Bretton Woods exchange rate system collapsed in 1971, Mr Scott said its ongoing weakness had caused gold to arise as an alternative.

He added: "Following the current credit crisis, there has been increasing disquiet about the role of the dollar as the world's leading reserve currency, especially from countries with large trade surpluses that have invested in US Treasury bonds.

"To revive the US economy and close the deficits, it is necessary for the dollar to fall, and the holders of US Treasuries are, understandably, fearful it has a lot further to fall."

The Chinese government, which has the world's largest store of US state bonds, would play a key role in negotiations over reserve currencies, the director predicted.

"The Chinese have been lobbying for an alternative reserve currency and proposed a paper gold standard to the IMF," he said. "It is not all jawboning, as they have been reducing holdings in US bonds and reinvesting some of the proceeds in gold."

He claimed this was unlikely to happen, but added that it was probable the dollar would never regain its old status as the pre-eminent reserve currency.

"Not only is that because, in future, there will be less confidence in the underlying strength of the US economy, but also because of the reducing importance of the US in a global context," Mr Scott said.

"The Chinese will before long be the world's leading economy, and the regime's comments about the dollar reflect that change in economic leadership."

Since the start of the rally, Mr Scott pointed out, gold has also replaced the dollar as the favoured commodity for risk-averse investors.

"The US dollar's weakness has established a clear link with the ascent of the gold price. Despite the US economy's ongoing weakness, the dollar is still seen as a risk-averse investment, and, therefore, as risk appetite returns to asset markets, this has added to the dollar's weakness.

"Conversely, this is another reason why gold has been strong at a time of improved investor sentiment."