What's up with the Dollar and Gold?

The relationship between the value of the dollar and gold has apparently changed of late. For most of the past year, dollar weakness went hand in hand with gold strength, and vice versa. In the past week or so, however, gold has risen (note that gold in the chart is inverted) while the dollar has also risen.

I'm not sure I have a convincing explanation of why this is happening or what it tells us. On the surface, gold is rising because geopolitical tensions and trade frictions are rising (e.g., Geithner is bashing the bashing the Chinese for "manipulating" their currency, and Congress wants to insert "buy American" wording into the stimulus package). Why the dollar should also be rising, though, I'm not sure. Perhaps it's just that the dollar in the final analysis is still the world's reserve currency, and so it is the currency of choice when things get ugly.

Comments

[SW Richmond:]

It may be a short-term trend that will reverse.

It may be a preview of the decoupling that many feel will occur between USDX and gold in $. Such a decoupling is predicted to accompany a general loss of faith in fiat currencies. Radical dollar bugs rely on one argument, and one argument alone: the fundamentals of the dollar are crap, but the fundamentals of the rest of the fiat currencies are even crappier, so the dollar is king of the sewer.

These same dollar bugs will also tell you that gold is not money. Gold may be, MAY BE, giving early indications of just how big a lie that story is.

Things to watch for:
1. Backwardation in gold
2. Federal Reserve Adjusted Monetary Base growth
3. Gold price decoupling (from USDX) mentioned in this article
4. Federal Reserve balance sheet growth
5. Movement by governments towards further abrogation of financial contracts, especially derivatives
6. Collapsing western currencies

Expect stick saves in the form of 'emergency measures' to 'restore stability' etc etc.

Jan 25 01:58 PM

[Hefaistos:]

'Everyone' seems to 'know' that the dollar is going to drop. That will make gold rise. Thus, smart investors discount this knowledge and trade the dollar up already now.
When will the dollar drop? Maybe starts already this week, if the treasury auctions have some problems. Or maybe later, when we see a pickup in economic activity.

Jan 25 02:43 PM

[Smarty_Pants:]

"Geithner is bashing the bashing the Chinese for "manipulating" their currency"


Geithner should be careful where he treads. If he doesn't like the Chinese manipulating their own currency how much less will he like it when they decide to start manipulating the dollar by dumping their reserves on the world market hand over fist?

As my grandmother used to tell me, "Beggars can't be choosers".

Geithner is apparently unaware of this old saw.

Given that the US is the world's largest 'beggar' (ie. borrower) it is disheartening to see politicians and bureaucrats act contrary to common sense time and again. Sooner or later it will catch up with them and we will all suffer the more for it.

Jan 25 03:48 PM

[George Kesa...:]

Perhaps people are getting out of the euro as well.

Jan 25 04:45 PM

[Gold Barron:]

I believe the wording "Buy American" is essential to a US recovery and stimulus plan. Tax imports from China and increase US manufacturing jobs here in the USA. Communist China is basically an enemy of USA. I know people like buying cheap goods at Walmart that are made in China, but the overall cost to the USA is too great. We can make our own clothes and toys here in USA.

China is increasing military spending and at the rate they are going will be a stronger power militarily and economically than the USA.

If China wants to dump their US debt holdings to others so be it. The US is trying to weaken the dollar by reinflating the economy. What they have done so far has not worked. China dumping the dollar would certainly weaken the dollar and cause the inflation we desperately need right now.

Buy Gold!!

Jan 25 05:12 PM

[GMiki1:]

Geithner is merely mirroring Paulson. It was stupid then and it's stupid now. The Chinese have manipulated in the U.S. consumers' favor, so we could buy their goods. The U.S. manipulates everything in favor of--well, who has benefitted? Ultimately, no one. If the banks have actually benefitted why do they keep going broke?

The dollar and gold may well part ways as we saw on Friday when no other currency seemed particularly appetizing. Gold is money. Everyone I know suddenly woke up and sees that there's safety in gold.

Jan 25 06:16 PM

[Conan the B...:]

Gartman brought up an interesting point in another SA Article.

Gold as an investment, not because of imminent inflation or other type of conflagration.

Physical Gold as part of everyone's portfolio up to just 5% or so would trigger a massive rise in its value based on scarcity alone.

In this scenario, inflation does not have to play a part.

An under owned inflation commodity could turn into an investment play which will be pushed by investment advisors as a means of diversification.

Gold can rise strictly on scarcity merits.

Jan 26 01:16 AM

[Sinoman:]

What's your point - just felt a need to write something with no value?

Jan 26 03:34 AM

[huangjin:]

Here is the short answer to your conundrum: gold is money.

Jan 26 10:46 AM

[thannagan:]

Everything, at least the price of everything, is a function of supply and demand. Gold, (even moreso than oil), has a relatively well-known (and fairly limited) supply, now and in the near future. Demand is less well known, but has a number of well discussed facets. US$ and USA Treasuries have very different supply characteristics and likly (increased supply) changes in progress. Demand for same is also endlessly discussed. At any point in time, demand and supply for all of these will dictate prices.

(Long: GLD,TBT)

Jan 26 12:25 PM