The gold price rallied 3.9% in the first week of 2010 as the price of gold and the shares of gold mining producers both re-established their upward trends following a $152 correction in the gold price. Money flowed into gold, which rallied $42 to $1,136.38 per ounce, and the rest of the commodity complex as investors bet on a fresh advance in inflation beneficiaries. Strength in the gold price fueled gains in gold mining stocks, as the Market Vectors Gold Mining ETF (GDX) displayed its leverage to the price of gold by appreciating 7.9%, to $49.84. The advance in the GDX was led by Canadian-based gold mining companies Barrick Gold (ABX) and Agnico-Eagle Mines (AEM) - two of the world’s leading gold producers - which finished higher by 5.2% and 10.0%, respectively.

The strong performance in the gold price and gold mining stocks came despite a relatively small decline in the value of the U.S. Dollar - as the greenback dropped -0.5% against a basket of America’s trading partners. The broader equity market, similarly to the gold sector, posted solid gains in the new year’s opening week. The S&P 500 closed the week higher by 2.6%, led by the energy and materials sub-sectors. The PHLX Oil Service Index moved up 11.1% last week on the back of a 4.3% rise in crude oil -which moved back above $80 per barrel.

Gold surged $19 following the release of Friday’s weaker than expected unemployment report. The report showed a decline in payrolls of 85,000,and while the official unemployment rate held steady at 10.0%, a deeper look at the numbers reveals that this was the case only because 661,000 workers left the labor force. The unemployment rate would have been roughly 10.4% had these discouraged workers been counted in the Labor Department’s figures. The percentage of working age Americans in the labor force, just under 65%, is the lowest in 25 years. Even more disturbing is the fact that 40% of unemployed workers have been jobless for over six months. The U.S. has lost 7.2 million jobs during the recent recession.

The weak unemployment report, coupled with the dovish commentary contained in the most recent Federal Open Market Committee minutes, appears to have pushed back the time frame for a normalization of monetary policy. Given the lower probability of a hike in interest rates by the Fed, coupled with the potential for an expansion of quantitative easing programs suggested by Fed officials in the minutes, investors and traders added to dollar carry trades. This helped send the two-year Treasury bill back under 1% and pushed traders and investors to add to higher-yielding and riskier assets.

Judy Shelton, an economist and author of “Money Meltdown: Restoring Order to the Global Currency System” criticized Chairman Bernanke in an editorial in this weekend’s Wall Street Journal. Shelton chided the Federal Reserve Chairman for his denials at last week’s American Economic Association’s annual meeting that “monetary policy from 2002 to 2006 appears to have been reasonably consistent with the Federal Reserve’s mandated goals of maximum sustainable employment and price stability.” Labeling such comments “disturbing” and criticizing the Fed’s focus on core inflation measures, Shelton cited the 50% rise in the average sales price of a home in just seven years and the “fact that the dollar went from being worth 1.17 euros in October 2000 to a mere .63 euros in April 2008” as evidence that the Federal Reserve failed in its objective of price stability.

The economist and author went on to discuss the rally in the price of gold from $282 per ounce in 2000 to over $1,200 last month as another example of the instability in the value of the U.S. dollar. Shelton suggests that “for those citizens who’ve become skeptical of the Fed’s ability to guarantee price stability in terms more meaningful than elementary CPI statistics…why not provide a new class of Treasury obligations that would guarantee the purchasing power of the dollar in terms of gold?” She stated that Congress could pass legislation that authorized “a limited issuance of gold-backed Treasury notes.” Tied to the price of gold, such securities would not pay interest but could pay the principal at maturity in terms of ounces of gold bullion - to be determined by the appreciation in the gold price.

While Shelton’s suggestion will likely fall on deaf ears at the Federal Reserve and at Congress, the broader point is that the continuing instability in the value of the U.S. dollar has the potential to foster a more material rise in the relevancy of gold as an alternative currency.