NEW YORK (Commodity Online): Gold prices will continue to witness an uptrend in 2010 but investors should expect continued high volatility-resembling an amusement park roller coaster ride, according to Jeffrey Nichols, Senior Economic Advisor to Rosland Capital.

In his latest commentary on market trends, Jeffrey Nichols said that gold prices won't move up higher without interruption.The two main sources of gold price volatility will continue to be the investment demand for the yellow metal and volatility in dollar's exchange rate.

Investment Demand
The growing importance of investment demand; the ease of entry and exit afforded by gold exchange traded funds and some of the other new gold-investment vehicles that have gained importance in various local markets; and the participation of more hedge funds and other institutional investors and speculators, some of whom lack long-term allegiance to the yellow metal or may be more trading-oriented than the typical retail investor.

Dollar rate
Volatility in the dollar's exchange rate, reflecting the currency market's quick judgments about U.S. monetary policy and the timing of the Fed's first step up in interest rates; similar judgments about European and British monetary and fiscal policies; and perceptions of sovereign risk (related to Greek, Spanish, Portuguese, or Eastern European government debt, etc.) that may send currency traders temporarily to the dollar as a safe haven.

At some point, the U.S. dollar exchange rate vis-à-vis the euro, the pound, and the yen will become less important to the gold price as all these currencies come to be perceived as sinking ships. Paradoxically, recent periods of dollar strength have been attributed to its safe-haven status in the face of uncertain world financial markets. This is a role that has traditionally been played by gold - and gold will again retake center stage as investors come to see the dollar, along with the other major currencies, as depreciating assets losing real purchasing power.

I believe we are heading into a period of further economic weakness here in the United States and in the other old industrialized nations - a double dip - that will become readily apparent by mid-year if not sooner. At the same time, by summer, we will begin to see some undeniable signs that U.S. inflation is again stirring.

Looking further ahead, the industrial world faces an extended multi-year period of stagflation - low economic growth, continuing high unemployment, a drop in average living standards, and consumer price inflation well above the acceptable rates of recent years.

Meanwhile, the newly industrialized or emerging economies in Asia and elsewhere - led by China, India, Brazil, and, yes, Russia - will fare well by comparison with relatively strong growth in output and employment, restrained consumer price inflation, and appreciating currencies versus the U.S. dollar, euro, and the British pound.

Here in the US, our economic pain is largely a consequence of, consuming and spending more than we could afford at all levels of government and society. In a real sense, we are bankrupt and the repo man is now knocking on our door, Jeffrey Nichols said.

At the same time, judging from the Fed's own balance sheet, quantitative easing continues. For now, I can't see how the Fed can do otherwise - until there is a significant stabilization in the housing market, a sustainable and continuing improvement in the labor market (with declining unemployment), and rising consumer confidence . . . or until inflation rates are so high that a return to price stability takes precedence. In the meantime, the Fed must continue buying U.S. Treasury debt and housing agency debt with newly printed money.

Without the political will power by policy-makers to bite the bullet and a willingness by Americans to accept a lower standard of living for a period of time, we can expect a continuing balancing act by government between the demands of our foreign creditors and the bond market and the voters, who may turn on incumbents are unable to deliver on their false promises of a quick return to the good old days.

The 'Safe-haven' status is gold will be further established in the coming years as low interest rates, continued trillion dollar deficits, rising US and European inflation will have its impact o the world economy.

It means rising prices for oil and other commodities (including platinum, palladium, silver, and foodstuffs) in world markets - as Asian nations, especially China and India, continue their rapid industrialization and growing Western-style consumerism. And, higher commodity prices will simply aggravate the monetary-inspired inflation here in the United States.It means strong and rising private-sector investor interest in gold from newly industrialized nations - as rising personal income and wealth finds its way into gold, the most traditional form of savings in many of the Asian countries.

It means continued official demand for gold - from both central banks and sovereign wealth funds - in order to reduce, if only a little, today's excessive exposure to U.S. dollar risk, Jeffrey Nichols said in his commentary.