Debunking the Gold Bears' Main Argument

Gold bears tirelessly repeat that deflationary periods are characterized by heightened demand for cash. For the United States, this means a strong US dollar.

Since the USD and gold are inversely correlated, the bears conclude that the gold bull market is over given that we have entered into a severe deflationary period.

This may seem like a strong argument but it does not withstand a more detailed analysis.

Although the inverse relationship between the US dollar and gold is true most of the time, there have been extended periods when both gold and USD appreciated in value. We only have to go back a few years to see a positive relationship between the two. Believe it or not, even in 2008, gold gained 5.8%, while the US Dollar Index gained 7.5%.

Today, most analysts who are bearish on gold believe that the US economy has entered into a deflationary recession similar to the Japanese lost decade of the 1990s. However, during the second half of the 1990s, when Japan was in the midst of a severe deflation, the Japanese yen fell dramatically by almost 50% as seen in the chart below.

Currency exchange rates during the period of competitive devaluation cannot have a meaningful effect on the behavior of gold. Excess supply of world fiat currencies will only move gold higher regardless of some currencies’ fluctuations in relation to other currencies.

Comments

[NOWHEREMAN:]

Since Gold was not priced in Yen, before/during the period in focus, the corelation is hardly reliable.

For Gold to move higher, it has to do so against some measure. Since it is predominantly priced in USD, then that is the currency it will have to move higher against.

"Believe it or not, even in 2008, Gold gained 5.8% while the US dollar index gained 7.5%." Translated, gold Fell against the USD by 1.7%.

Keep spinning, Even Pamela Aden disagrees with you.

Jan 05 08:50 AM

[De Graaf:]

Sure NWM, keep spinning!

You tend to live in a world of your own. One that is predominantly occupied with dollars while the rest of the world is tossing monopoly money you reckon' right? Get outta here.

The dollar is at its utmost unreliable period in history and you argue that that currency still is reliable. Who's spinning wildly momentarily? Not us.

You were wrong about golds rise against a basket of world currencies, and your drifting again with this egocentric American attitude as if other currencies don't matter. Maybe not for you, but we surely do. Profitably that is.

Go Nowhere and listen to that Man.

Jan 05 10:47 AM

[lance sjogren:]

Both Sobelev and NWM miss the point comparing the performance of gold and the dollar in 2008.

Suppose gold went up 100% in first half of 2008 and the USD went down 50%.

Then suppose gold went down 50% in the second half of 2008 and the USD went up 100%.


That would show gold and the USD running EVEN for 2008, even though they would have performed exactly the OPPOSITE from each other.


Comparing their prices over a 1 year span is utterly meaningless.


That being said, I am bullish on gold. There is virtual unanimity, even among the Kool-Aid drinkers of CNBC, that the current US monetary and fiscal policies will lead to big inflation. The only question is the timeframe. 6 months from now? 2 years? 3 years?

I don't know the timeframe but I am confident when the inflation shows up gold will go much higher. And, I do agree with Sobelev that when countries around the world are debasing their currencies, currency exchange rates will not necessarily be a meaningful benchmark for monetary inflation.

What will be a useful gauge? Why the exchange rate between the USD and gold, of course. Remember, just because it can't be printed out of thin air doesn't mean gold is not a currency.

Jan 05 11:24 AM

[Roger Knights:]

NWM wrote: "'Believe it or not, even in 2008, Gold gained 5.8% while the US dollar index gained 7.5%.' Translated, gold Fell against the USD by 1.7%."

No, here's what the author was saying: "Gold gained 5.8% [against the dollar] while the US dollar index gained 7.5% [against a basket of six or eight other currencies]."

The real "translation" is that gold rose even more in terms of those foreign currencies.

Jan 05 11:47 AM

[NOWHEREMAN:]

Lance: Couldn't agree with you more. Timing is the Issue.
I Just believe the Dollar goes up short term.

Roger: The author is very specific.The Paragraph I quoted from starts with "Although the inverse relationship between the US dollar and gold is true most of the time..."

He does not differentiate, he just believes that Both can/will rise at the same time.

I believe in his 2nd paragraph: "Since the USD and Gold are inversely correlated..."

The Dollar will rise for a 2nd year in a row. My opinion, to at least 92, possibly to parity.

When it starts to decline, and it will, 70-72 will not hold.
I am looking for the 40-50 area.

IMHO

Jan 05 02:05 PM

[tb1975:]

Roger's right

Jan 05 10:11 PM