By Kishori Krishnan Exclusive To Gold Investing Newswidth=300

Here we go again - is gold price in for a slide or a rise?

Wednesday morning the gold price fell through $1,120 per ounce, its worst decline in 2010, as a marginally weaker US dollar was unable to buoy the price of gold. Throughout the day, the price of gold continued to move lower on talk of tighter monetary policy from central banks around the world.

On Thursday morning, though gold price recovered to $1,138 in early trade, other issues came to the fore, vicious enough to rock the boat.

President Obama has decided to seek a tax on big banks to recoup up to $120 billion that the government expects to lose from bailing out the financial system.

The new tax on banks, insurance companies and brokerages with more than $50 billion in assets would start after June 30 and seek to collect $90 billion over 10 years, according to a report.

But the levy but would remain in force longer if all losses to the bailout fund, the Troubled Asset Relief Program, are not recovered after a decade.

What does this mean: the dollar will firm up.

And that is not all. With many of the nation’s largest financial firms set to report their latest quarterly results, bonuses might not be the only thing that will be big.

Three banks - Bank of America, Citigroup and Wells Fargo decided to repay billions of dollars in bailout money that they owed the government, obviously showing that they got things under control.

The government is creating funny money - money out of nothing - and that doesn’t fix anything. All it does is prolong the problem and make it worse by destroying the currency, the US Dollar.

If the Fed sees an improved economic environment, calls for Ben Bernanke to begin unwinding the Fed’s $2.3 trillion balance sheet will grow louder.

What would this development lead to: the dollar will firm up.

Now for the real shock and awe. You have been hearing about the paper money in the system - committed to heading off of a deeper recession, printing presses were turned on worldwide. The Fed flooded the market with enough excess liquidity to support the banking system - but did you check out the price of oil?

Oil prices peeked above $80 a barrel Thursday in Asia as rising stock markets, ahead of fourth quarter earnings, cheered crude investors.

A move to $100 a barrel would mark a 60 per cent correction off the lows hit in early 2009.

Benchmark crude for February delivery was up 40 cents to $80.05 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Wednesday, the contract gave up $1.14 to settle at $79.65.

Oil investors often look to stock markets as a measure of overall investor sentiment about the economy. Sometimes, it keeps a lid on the stock exchange, like it did for the TSX.

And for many investors, gold as a safe-haven play appears to have retreated with investors’ heightened taste for risk ensuring that they move back into equities.

Oil has fallen from near $84 a barrel earlier this week on signs of weak US crude demand. The Energy Information Administration said Wednesday that US oil inventories grew more than expected last week, despite a cold weather spell that analysts expected to boost demand for oil products such as heating oil.

“From virtually any perspective, the weekly EIA stats looked bearish,” Galena, Illinois-based Ritterbusch and Associates said in a report. “Further price slippage toward the $75 area would appear likely.”

And if that happens, what does it mean: the dollar will firm up.

The dollar is the glue that holds many other commodity markets together, as most major commodities are priced in US dollars. The dollar is also expected to rise this year as US investors reduce the share of foreign assets in their portfolios.

Status Quo?

Washington’s response to the worst recession since the Great Depression continues to be one of gigantic fiscal stimulus, rapid increase in money supply, and near-zero interest rates.

Now comes the harder part - timing the withdrawal of these measures.

For, if the measures are removed too soon, the nascent recovery could be aborted and the economy can slide back into recession.

If the measures are kept too long, they could stoke inflation and increase the chances of asset bubbles.

Gold’s upside potential can be limited if the US economy cooperates and renders the Fed’s job easier. Think that is likely to happen in the near future?