The U.S. Dollar: Waiting to Tank Gold's Run? 39 comments
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“Gold kind of scares me because very often the people involved with it seem to be slightly insane.”
– James Montier, head of equity research, Societe Generale, London
Some say that it doesn’t matter when you buy gold, that you should buy it regularly and always, and that it represents the only true store of value. Fair enough. When all is said and done, buying gold may be the only means of acquiring real wealth for the very long term. Especially today, when all major currencies are devaluing by hook or by crook – some voluntarily, others not so – it behooves an investor to shore up his gold holdings.
Yet at the same time, from a pure investment point of view, it’s never a good idea to sink money into a depreciating asset. That’s what the smart guys call “dead money.” And when it comes to gold, which neither pays a dividend nor offers interest, a decline in value against other asset classes is not something we want to bear, if given the choice.
That in mind, we come (again) to comment on the current price level of the yellow metal, and to suggest what is to be done for those who currently hold bullion and/or gold stocks, and those who are considering making an imminent purchase.
First the case for immediate purchase:
- Gold is a hedge against inflation (so they say), and we have massive inflation in the pipeline.
- Gold is a safe haven and will rise due to continued financial troubles globally.
- Gold is the only currency capable of replacing the fiat currency monstrosities now in use the world over.
- Bullion supply is declining.
- Investment demand for gold is underpinning a steady, unstoppable rise in price. The chart below clearly shows the increased role ETFs are playing on the demand side – irrespective of the price of the metal.
And now the case against:
- Weak fabrication demand. Gold jewelry accounts for about 60% of global gold sales. In times like these, though, it’s hard to imagine buying the dear Mrs. another dear piece of jewelry.
- A strong dollar would take the wind out of gold’s sales, and could drive it significantly lower.
It’s to this latter point we now turn our attention.
Look here:
click to enlarge
You’re looking at a chart of the U.S. Dollar Index for the last year. We’ve brought it to make a comparison with gold, but first a brief explanation.
Gold and the dollar have an inverse relationship; when one is rising, the other falls. It hasn’t always been this way, but long enough to be relevant to those of us who care about timing our gold purchases. According to Bloomberg, gold and the dollar have had a
-0.7% correlation over the last five years. That’s significant. Now look here: 
This is gold over the same time frame. Note the correlated decline in price.
Research from the World Gold Council shows that the correlation between gold and the dollar is stronger when the latter is falling. At such times “investors tend to diversify away from dollar-linked assets, boosting the negative relationship between the two.”
Fine. But that leads us to the $64,000 question: what to make of the purple, boxed areas on the right side of both charts.
On the one hand, we have a dollar that pulled back significantly after its rise into December, and which is now moving up to test its previous highs. And on the other, we have gold’s uninterrupted climb of $200 from its late November lows around $720. How do we account for this? What happened to the inverse relationship? Should we expect things to look different? Or is this just one of those times (30%) when the two don’t correlate?
Or could it be that the World Gold Council’s research explains it. Could it be that the dollar’s fall led to a “heightened” inverse correlative with gold, a sort of extraordinary stimulo-genesis of the AU tissue in goldbugs the world over that led to frenzied buying and will yet prove their undoing when they wake up to the fact that the dollar may yet spike to new highs!?
And what will happen to their gold rally then, friends?
The negative correlation has been delayed. But it will not be denied!
More butter! NOW!
Disclosure: no positions
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This article has 39 comments:
Even "the public" is starting to wake up to the fact that when you can't even trust currency any more, holding gold can at least help you sleep a little easier at night.
The Fed is lining up the Treasury, it will be allowed not only to print its own money but to buy Treasuries with it,
which will allow it and the Treasury to print more money.
Congress will vote to allow both of them free reign.
DUMB MONEY just buys gold and silver coins and buries them in their back yard, and doing just fine.
Too bad they didn't teach common sense at Harvard.
Thank heavens I was heavy into gold and not stocks. My gains were protected.
Every asset class has its time and place. Squiqqly lines to the contrary.
Now go tell those of us who bought DGP 3 months ago instead of treasuries how badly we're mistaken..lol!
Who else has seen gains like this????
Gold bugs are not complaining. Has anyone noticed? A lot of my "traditional" portfolio tanked. Thank goodness I knew what to I had to do.
The author futher questions;
Or could it be that the World Gold Council’s research explains it. Could it be that the dollar’s fall led to a “heightened” inverse correlative with gold, a sort of extraordinary stimulo-genesis of the AU tissue in goldbugs the world over that led to frenzied buying and will yet prove their undoing when they wake up to the fact that the dollar may yet spike to new highs!?
And what will happen to their gold rally then, friends?
Ah yes another goldbug basher! What will happen if the $ make another higher high in USDX will probably be a minor correction in gold price and a consolidation period in terms of $. But gold in terms of the currencies that make up the USDX will make higher highs, especially the Euro and GBP, therefore keeping demand for gold globally strong and mitigating any strong gold weakness in $.
So as the author has futher disclosed...Disclosure... no positions
It is my recommendation to you that if and when the $ makes new highs in the USDX then you should be buying gold/silver positions and stimulo-genesis your AU tissues. GOT IT!
Do we have more details of what Gold is doing in other currencies for FY09. Would be interesting to play other ETF's if Gold is going up in Pounds, Euros or othe Asian Currencies. Different way to play the gold market.
On Feb 06 08:02 AM notagoldbug wrote:
> GOLD is hitting new highs in all currencies except yen/US dollar...liquidation
> of yen carrytrade has temp put a bid into these currencies despite
> this US dollar strength gold has rallied....also with itnerest rates
> zero holding gold no longer counts as a depreciating investment.......holdi...
> gold is actually a real rate argument.......so depending on your
> inflation outlook....if its above zero then u get a negative real
> return on st investments making gold look good.........gold is the
> only asset in a bull market.....wake up
Gold chugs to new highs before the end of the year. I made this call 2-3 weeks ago.
Gold Investors are supposed to be investors. Investors take profits.
Some where over the last 8 years, almost every component in the Basic Materials group OUTperformed Gold- I believe aluminum was the sole exception.
Gee, Gold outperformed aluminum.
Gold is down over the last 12 months. Gold shares are down more.
Am I happy, heck no. If I sell today, I will lose money on the shares I bought 12 months ago, 8 months ago, 6 months ago. I ran out of money before I could invest at the bottom 3 months ago.
Mrs. Brown's 3rd. Grade Class is very happy that you were able to come by and show us your pretty graphs. But everyone here already understands supply and demand and the value of MONEY. Remember that's the stuff where the less of it there is and the HARDER it is to obtain the more stuff people will give you, if they want some of it. The vending machines near the cafeteria will trade you chips for those things the Govt. makes, but when I want to buy an apple from another kid or use his bike or buy his bike he wants me to give him Morgan or Liberty SILVER. If I want to use the small shed of the nice man next door to keep my bike out of the rain this winter I can offer him 2 100$ bills or I can but 8 Morgan Silver Dollars in front of him. Which do you think he will prefer.
Mrs. Brown had us open up our Geography books after you left and she showed us the DIFFERENCE between the United States being at the center of the map and the center of the world. You remember the rest of the world don't you Matt, ( you know those little countries like China, India and the other places down at the bottom, collectively called Latin America.) Those places where all the dumb people live who don't trust their Govt. or the Banks. They use GOLD and SILVER made into small pieces of jewelry as their "Mobile stored value." But wait a minute, we forgot, there are BILLIONS of those dumb people, so maybe, just maybe, that could add and continue to add up to a whole bunch of that "Stored Value" which is mobile and can go anywhere.
So Matt, me and the other kids would like to thank you for coming by and we wanted to ask you if you would like to come by after school and play some "Hard Ball", but just remember, if you hug the plate with the Big Boys, one of them may aim for your head.........maybe you were hugging the plate Matt.
PS. 1) I had this time to amuse myself (at your expense) while GLD & SLV was going up.
2) Dear other readers, was I "Too hard on Young Master Matt"?
Do you just make this stuff up? I know plenty of goldbugs but not a single one of them fits into your catgories.
On Feb 06 01:12 PM ROLEX18 wrote:
> I wrote in my previous comments you can see about the Gold bugs category,
> unmarried (70%), homosexuals (60%), living with divorced mother till
> the end, schizofrenics 40%.
> The kind of bugs I would never make a handshake with without using
> sterilized gloves that surgeons use when they make a heart transplant.
During deflationary times, as the cost of items fall, the relative value of money increases and for this reason gold, as a currency, does well. At the same time those who have money become rich while those without continue to struggle. A bank clerk who keeps his job will employ a gardener, while the one who loses his job becomes the gardener.
A self-sufficient hunter/farmer/fisherma... has no need of currency of any kind – provided he is completely satisfied with his life style and feels no need to provide for his old age.
However should he want a little coffee, sugar or a Plasma TV to lighten his life, the simplest way is to first exchange (sell) his excess of barley or fish for money and of course cash money can be saved for old age, not so easy with fish or game.
What currency should he select? Normally he would have little choice and will gladly accept the perfectly adequate currency of the country in which he lives.
However let us suppose that he lives close to the border of two countries at war with each other. Uncertain who will win he would probably accept both currencies until it gradually became clear which way the tide of war was flowing. With the currency of the loser highly likely to become worthless his preference would gradually move to that of the likely victor. What would the Shekel be worth if Hamas defeated Israel?
This course of action will protect his spending power for immediate needs but would almost certainly bring home to him the inadequacy of his provision for old age. The war just won might not be the last war fought, another country, with yet a different currency could well be the victor next time around. The need for an international currency becomes immediately apparent and gold is the only one he knows of, he can obtain it fairly easily and it has been around since at least the days of the Pharaohs.
In today’s complex world, war is not the only threat to the value of a country’s currency, the printing press is every bit as dangerous to financial security. A loyal citizen may well feel uneasy about questioning the ability of his leaders to maintain indefinitely the safety of its citizens or the value of the currency and is normally happiest investing in the Stock Market or, patriotically, in Government Securities and recent history tells us this is usually the most profitable course to take. However history didn’t begin recently and who can foresee the future?
In normal times investing in gold is rather like not going to the races, you won’t multiply your stake money but it will still be there for a future visit, even if you live as long into the future as Julius Caesar is in the past. A contemporary benefit is that we are not living in settled times and buying gold has a high chance of being as profitable as a winning day at the races.
If someone buys gold, and then the price drops 30%, were they wrong? It really depends on the reason they bought it. If it was a short term speculative trade, then yes. If they viewed it as insurance, then no. To that person, the 30% loss becomes the cost of the insurance. Really it was the *risk* that was the cost to begin with...not the 30%. And that risk had a maximum cost approaching 100% of the price you paid. (e.g. the alchemist finally get it right and can turn spam into gold)
I have homeowner's insurance...pay my premiums. So far, that "investment" hasn't worked out very well for me, thankfully..
These are not the people who will buy gold, they are just beginning their journey up the Increased "Standard of Living" Trail.
The people who will buy Gold will be those who have seen declines and will want to protect other assets in the future.
An Investment Grade appelation is more forceful than an Insurance play against whatever. This new status has been given Gold by the various Financial Institutions who see it as an Investment vehicle that the public will be willing to buy since this asset IS Not at multi-decade lows.
Deflation/Inflation won't matter. The Gold Gurus will be supplanted by a multitude of Invesment Advisors.
They will lead the way. Gold will easily surpass $2,000.
But that is only a little over 100% from here. UGL is a much better play than GLD, and some of the Junior gold miners with production will go up a 1,000%.
As an Asset class which the Financial Community approves of, Gold will not be Confiscated.
Imagine if all currencies experienced high inflation at the same rate. We wouldn't know it was happening based on exchange rates. We would only see that gold was increasing in price, or more precisely that an ounce of gold would buy more dollars, yen and euros.
If it turns out that the Bulk of the Obama stimulus does not Start to go into effect until 2010, then what's the point of sitting in gold waiting for that aspect to begin.
Insurance, that the USD will hold up until then?
Insurance is one thing, an investment is another.
Have you considered the 3X ETFs? (ex-ERX)
For short term pops: like TNA and FAS.
I bought FAS at $9.89, Friday.
Some newscaster came out with the comment that the Financial portion of the S&P was only 5% of that index a couple of days ago. So I figured that to have a greater impact on the S&P to the downside, they have to go up first.
The BDI has legs, soft commodity legs.
Big droughts in Australia, China and California combined with the currently unknown damage from the unseasonably cold weather will restart inflationary expectations in the Ag complex.
Gold will be off to the races and the shippers will have something to ship.
I may have been a bit hard on you regarding Mrs. Brown's class. But I think the "Thinkers" need to look at the real world from time to time. So I am not singling you out, there are quite a few others in the boat. The price of Morgans, Peace and Liberty silver continues to climb as does the price of Gold and Silver. If you wish to have some of this "Stored and Mobile Value" you must pay accordingly.
I did not with to insult you I merely wanted to inform you as to what is going on on the street.
On Feb 06 06:27 PM TexasER wrote:
> I find humor in how seriously people take their gold positions...on
> BOTH sides of the debate. Am I the only one?
>
> If someone buys gold, and then the price drops 30%, were they wrong?
> It really depends on the reason they bought it. If it was a short
> term speculative trade, then yes. If they viewed it as insurance,
> then no. To that person, the 30% loss becomes the cost of the insurance.
> Really it was the *risk* that was the cost to begin with...not the
> 30%. And that risk had a maximum cost approaching 100% of the price
> you paid. (e.g. the alchemist finally get it right and can turn
> spam into gold)
>
> I have homeowner's insurance...pay my premiums. So far, that "investment"
> hasn't worked out very well for me, thankfully..
>
The one word strangely missing on this entire page. Do a search on this page. You won't find that one missing word: OIL. Human beings can't eat or drive gold, but we can't eat or drive dollars either--though in the not too distant future we might find we're able to burn 'em to heat our houses. The one stable, dependable condensed value that is easier to move around than oil is gold. Energy and real non-inflatable money are the wave of the intermediate future. Oil to drive the tractor, combine and pump the water. Trading gold to bypass the inflators to move the oil. At least until someone can be trusted for a while again that some new currency will be redeemable in either one upon demand. HP.