Gold prices are dropping right now as American investors’confidence in the U.S. dollar continues to mount.

But the dollar’s foundation is more unstable than you might think.

According to Rick Rule, Chairman of Sprott U.S. Holdings, “The dollar’s dominance will continue. Not because it’s strong, but because the competitors are weak.”

Indeed, given the dollar’s underlying weakness, gold’s recovery might not be far off.

During the second part of our exclusive interview, Rick says that gold doesn’t need to knock out the dollar completely to recover…

It just needs to land a good punch.

Karim Rahemtulla: Gold and other precious metals are in a bull market in terms of yen and euros, but in terms of dollars we are sucking wind… Even more so when it comes to gold and silver equities. How much longer do you think the current dynamic will last? It’s the bear markets that test the mettle of investors. And while cycles are the norm for investing, quite a few believe that the price of gold will never recover. Why is gold not rallying in the face of declining currencies and reflation globally?

Rick Rule: There are 50 to 60 cited reasons for gold prices to decline. Few, if any, hold water. Gold is in a battle with the U.S. dollar, and it’s losing badly. Gold doesn’t have to win the battle, though, it just has to lose “less badly.”

The dollar’s dominance will continue. Not because it is strong, but because the competitors are weak. It’s the prettiest mare in the slaughterhouse, as my friend Doug Casey, a veteran investor in precious metals and commodities, likes to say.

Confidence in the U.S. dollar is at unprecedented levels, and the U.S. economy is quite strong compared to its peers, and that trend is not in danger of abating.

It seems that investors are no longer focused on issues like the deficit or fear of collapse of the system. Remember, in 2011 the deficit was $14 trillion, and we were going off the cliff – fear of default, etcetera. Now, it’s $18 trillion, and still headed higher. But because of the economic recovery, the strong U.S. dollar, and the implosions in Europe and Russia… things are okay in the eyes of the American investor.

Karim: Will confidence in the U.S. dollar remain?

Rick: That is the question. Domestic economy is strong, but artificially low rates or negative rates cannot last forever. We will see some type of revaluation of interest rates and the U.S. dollar.

Multinationals [based in the United States] are losing money. And when exports begin to suffer, the argument for weakening the dollar may force the argument. Gold and the dollar have rallied simultaneously before, and that could happen again. As I said earlier, gold doesn’t need to win the battle against the dollar, it just needs to lose less badly.

Rick: No, I don’t think we have seen capitulation yet. But it’s less important than the actual investment dynamic of gold.

Karim: Let’s move on to the miners. Have we reached the point of capitulation for the junior miners? They seem to be surviving much longer, despite the carnage in the sector. As you alluded to in your comments to me about junior oil companies, those companies do not have access to the same type of bank financing.

Gold is an afterthought in the financial marketplace. It makes up less than 0.5% of the savings matrix of the average American. When it makes up such a small percentage, it doesn’t take much in the way of buying or selling to create a significant move in prices. When we see a lessening of faith in the U.S. dollar, a shift of 1% or 2% in investor allocation would make a huge difference for prices.

Gold responds to both fear and greed. If gold runs as a consequence of fear, the run-up is exaggerated by the greedy buyers who step up to take advantage of the momentum, and the fear of losing out on the trade. This keeps up until the market collapses under its own weight, and that is exactly what happened when gold jumped from $700 per ounce to $1,900 in such a short period of time. What kicks off the gold trade is a lessening of the hegemony of the 10-year Treasury note or the U.S. dollar.

When weakness is spotted, gold should respond in positive fashion.

Rick shared his thoughts on energy prices in the first half of the interview last week.

And the chase continues,

Karim Rahemtulla