The gold price rose to an all-time high of $1,195 per ounce early this morning as the rush to gain exposure to the gold price showed no signs of abating. COMEX gold futures posted a record close for the ninth consecutive day and have closed higher for a remarkable 17 out of the past 18 trading days. Gold mining stocks closed at their highest levels since March of 2008 as the combination of strong gold prices and rising appetite for risk drove investors to purchase shares of both the largest gold mining producers as well as the pre-production small-cap class of emerging gold producers.

The rally in the price of gold and the gold mining stocks has occurred alongside the appreciation of equities, commodities, corporate bonds - virtually every asset class. They all share an exceedingly high correlation with each other and the common denominator has been their mutual reliance on a weak U.S. dollar. The Dollar Index (DXY) dropped to 74.23 in Wednesday’s trading session, its lowest level since August of 2008.

While the weak dollar is correctly pointed out as driving up the gold price, stocks, and commodities, a less discussed topic is what is driving the weak dollar. Clearly the Federal Reserve’s zero interest rate policy and $1.72 trillion dollar quantitative easing program has led to pressure on the greenback. Unprecedented monetary policy actions combined with the $1.4 trillion budget deficit and continued expansion of government has been largely responsible for the declining confidence in America’s currency. However, a strong case could be made that the strongest driver of the weak dollar at the current time is the renewed risk appetite prevalent in the global marketplace.

The disappearance of risk aversion that was so evident in the fall of 2008 and the first quarter of 2009 have given way to a general perception that the credit crisis and global recession has passed. While many believe significant challenges remain, notably persistently high unemployment and a daunting commercial real estate market, investors have re-deployed capital into risk assets. On Wednesday, the CBOE Volatility Index (VIX) hit its lowest level since August of 2008, before Lehman Brothers collapsed. The percentage of bears reported by Investors Intelligence recently registered a 17.4% reading, the lowest level since mid-2004. Other sentiment readings such as put-call ratios and percentage of cash held by mutual funds have also moved toward pre-crisis levels.

A healthier risk appetite has put further pressure on the U.S. dollar as market participants across the globe have sold the low-yielding U.S. dollar and purchased higher-yielding and riskier assets. The dollar carry trade has grown, similarly to the yen carry trade of a decade ago. This fact has buoyed the gold price and other gold-related investments. If risk aversion expands, a torrent of capital could lead to a short dollar squeeze and the subsequent selling of the assets that were funded by the carry trade. This has the potential to cause a material correction in the global equity markets, the commodity sector, and the gold price and gold mining equities. While the gold price and gold mining equities are counter-cyclical over longer time periods, their high correlations over the past year with traditional asset classes suggests that they could suffer a decline in excess of their more cyclical counterparts.

While U.S. markets are closed for the Thanksgiving holiday, the overseas equity markets are under severe selling pressure on news that Dubai World, the investment arm of the government that is saddled with $59 billion in liabilities, announced it would seek to delay repayment on its debt load. European markets slid roughly 3% on the news and losses in emerging markets were even more severe. The U.S. dollar rose on the news. Whether this is the beginning of a more severe correction in the equity and commodity classes is up for debate. While the longer-term outlook looks dismal for the U.S. dollar, the weak dollar trade is crowded, and the shorter-term driver in the currency, equity, and commodity markets is likely to be risk appetite. If risk aversion rises, the gold price and to a greater extent, the gold mining stocks, are at risk.