Price of Gold Says Nothing About the Dollar

The price of gold is up sharply and so is the chatter about inflation, debt, and the demise of Western Civilization. At a time when the critical global economic issue is unbalanced growth, the golden chatter ignores gold’s price in real dollars versus gold’s nominal price in yen, euros, and sterling. If the U.S. is coming apart at the seams, how come the real dollar price of gold is only 66% of the 1980 peak? Why does the yen today buy as much gold as the dollar does and also as much as the dollar did in 1980? Gold costs less for Europe than it does for Japan or the U.S., fair enough, but gold also costs Europe 1.5 times more than it did when gold peaked globally in 1980.

An intelligent conversation about gold is tough to come by because there is nothing like high gold and a low dollar to raise a politician's patriotic fervor to a fevered pitch and reduce the front pages to partisan diatribe. Even the Financial Times felt the need to join the fray. Today’s front page showcased an article on the dollar, gold and Obama’s political problems from all of it by quoting no less of an important voice than the erudite Alaskan Sarah Palin from her Facebook page --

[she] . . . sought to link the dollar decline to rising US indebtedness and dependence on foreign oil. “We can see the effect of this in the price of gold, which hit a record high today in response to fears about the weakened dollar,” she wrote on her Facebook page.

Sarah never misses the opportunity to show that she missed a few classes. The huge run-up in indebtedness that precipitated the current economic downturn occurred because the dollar was kept too strong. U.S. interest rates were consequently too low and the combination allowed the trade deficit to get too wide. Looking forward, a weak dollar and high real interest rates hold down debt fueled consumption growth and perhaps even generate the capital investment led recovery that goes a long way towards rebalancing the American economy. Ms. Palin would get more mileage from her perceived constituency if her populist rants focused on Asian nations keeping their currencies artificially cheap against the dollar in order to sustain their only competitive advantage -- cheap labor and lots of it.

The chart below illustrates that the recent run up in gold has nothing to do with the perceived value of the dollar. If it did, gold’s real dollar price would be skyrocketing in comparison to the cost of gold for buyers based in yen, euros, or sterling. Because it isn’t doesn’t mean that the dollar hasn’t or shouldn’t lose some of its allure for international investors -- if one wants to argue that the rising cost of gold is a vote against dollar assets. The failure of relative gold prices to break apart can only mean that U.S. trading partners have no interest in a competitively priced dollar. There is, for example, little other reason, given the events of the past 30 years, for the cost of gold to yen-based buyers to remain in lock-step with the cost for dollar-based buyers in real dollar terms. Since 2000, gold has gotten more expensive faster for dollar-based buyers than euro-based purchasers – and the trade balance between the two regions is relatively flat.

My suspicion is that rising gold prices have all to do with global liquidity looking for a safe asset at a time when equity markets are priced high, interest rates are at or near cyclical lows, and the dollar should devalue against those nations who own the bulk of dollar reserves (China and Japan). It is the relative pricing of gold across the major currencies that says the world isn’t quite ready for a U.S. economy poised to export.

Comments

[Beach Bubba:]

Sophomoric....

Oct 09 08:23 AM

[wdhalgren:]

This article says nothing about anything.

Oct 09 08:42 AM

[dfdanny:]

If you have an opinion, express it, if you just want to describe a situation, describe it clearly. Your article achieved neither.

Oct 09 08:58 AM

[Screwloose:]

Why are other currencies also slipping against gold?

Try the UK's out-of-control deficit and QE; Japan's staggering 200+% of GDP debt level [and declining ability to ever repay it] and the Euro's structural flaws/unknowable bank liabilities in Eastern Europe, Ireland and Spain.

Your supercilious sniping at Sarah Palin says more about your falseness than her honestly-admitted limitations. You'd rather have some slimy, fork-tongued, snake-oil salesman; who never strays "off message" - because they never actually say anything tangible at all?

Oct 09 10:39 AM

[TradingHelp...:]

I humbly disagree:

Gold is a unique creature in the investment world. It appreciated into the recession, like the US dollar, as investors sought a safe haven from market turmoil. Now as the global economy exits recession gold is appreciating again but this latest rally is inversely related to the dollar which is depreciating on US budget deficit concerns, firm risk appetite, the renewed chase for yield and predictions that the current Federal Reserve stimulus package will prompt inflationary pressures during 2010 and beyond.

This scenario of gold popularity and dollar apathy has helped pushed the precious metal’s price to a new record, above $1,050 per ounce.

Most commentators feel in the medium to long term there are more gains to come for gold and further weakness in the dollar with gold likely to gain favour with central banks seeking to build reserves with less reliance on the dollar. The return of the inverse relationship in the gold/dollar price has also provided central banks and other investors with a useful hedge against dollar depreciation.

Whilst a dollar collapse is extremely unlikely, the current trend of rising gold/falling dollar could accelerate if the market overwhelmingly shares the view that the dollar is in structural decline. This consensus could create a self-fulfilling prophecy persuading investors to sell dollars earlier, thus securing a higher sale price, and buying gold sooner, to secure a lower buy price.

Oct 09 10:48 AM

[JeffDB:]

I don't see how you refute Sarah Palin in your attack on her with the critique that immediately follows it:

Steve Blitz:

" [she] {Palin} . . . sought to link the dollar decline to rising US indebtedness and dependence on foreign oil. “We can see the effect of this in the price of gold, which hit a record high today in response to fears about the weakened dollar,” she wrote on her Facebook page."

"Sarah never misses the opportunity to show that she missed a few classes. The huge run-up in indebtedness that precipitated the current economic downturn occurred because the dollar was kept too *strong*."
---

But she never mentioned neither the economic downturn nor the cause for it, so how does your critique and analysis back up your apparent premise that she's a clueless idiot? It looks to me as if she was saying that our dependence on imported oil contributed to our trade deficit, and that deficit in conjunction with our rising deficit/debt was linked to the declining dollar, fears of further declines in turn was linked to the rise in gold prices.

Do you dispute that? If so, on what grounds?

You continue:

"Ms. Palin would get more mileage from her perceived constituency if her populist rants focused on Asian nations keeping their currencies artificially cheap against the dollar in order to sustain their only competitive advantage -- cheap labor and lots of it."

I agree with you about the yuan in particular causing much of the trade imbalance, but just prior to that you assert that the devaluation of the dollar "goes a long way towards" rectifying that situation:

"Looking forward, a weak dollar and high real interest rates hold down debt fueled consumption growth and perhaps even generate the capital investment led recovery that goes a long way towards rebalancing the American economy."

But if the Chinese peg the yuan to the dollar, and the dollar drops, so does the yuan. How is that going to change the competitive advantage they have via an artificially rigged exchange rate?

Oct 09 11:50 AM

[Donald Ingram:]

Your article is long on wind and short on movement. It has now been proven that the gold price has been/and is manipulated for years. Without this manipulation the present price of gold would be much higher than is now indicated. The dollars trend is down. There is nothing, economically speaking, to reverse this trend, if anything, this downtrend will continue. The powers that be want an orderly devaluation as can be seen since March 09, conversely a disorderly decent would spell disaster for all concerned, and the gold price would definitely skyrocket with most everything else, including a much higher rate of inflation.

Oct 09 12:41 PM

[lzzrdgrrl:]

".......My suspicion is that rising gold prices have all to do with global liquidity looking for a safe asset at a time when equity markets are priced high, interest rates are at or near cyclical lows, and the dollar should devalue against those nations who own the bulk of dollar reserves (China and Japan). It is the relative pricing of gold across the major currencies that says the world isn’t quite ready for a U.S. economy poised to export........."

Don't see much wrong with that conclusion.......

Oh.... and though the world isn't ready for a U.S economy poised to export, the unpreparedness right now isn't likely to hurt them ;) .....

Oct 09 09:23 PM

[Mr. Ed, Jr.:]

"The chart below illustrates that the recent run up in gold has nothing to do with the perceived value of the dollar"

It illustrates no such thing.

"Sarah never misses the opportunity to show that she missed a few classes. "

How would you know ? You weren't there, either.

Oct 09 10:17 PM

[vonschumann10:]

if by the dollar being kept too strong you mean that foreign central banks deliberately bought up dollar assets in order to preserve the weakness of their domestic currency to prop up their export driven economy, perhaps you have a point. But, on the US side of things, the Fed itself lowered interest rates in the early Bush years and sparked an obvious decline in the dollar's value as the supply of money was inflated. You also perhaps to do not understand that inflation typically reduces real interest rates, and this is indeed the logic behind Bernanke's attempts to use quantitative easing to avert widespread 'debt deflation'.

Oct 10 10:29 AM

[paxjds:]

The price of Gold has been on a steady march up, up , and up for the past 8 years or so. During this time, the dollar has been up and down, but Gold has been continually on the uptrend. The world market is and has been realizing that Gold is very under priced and therefore the price of Gold is going up faster than anything else. China, Germany, Saudi, Russia realize the value of Gold and are stocking up. Many Central banks are starting to do the same. Even some Funds are switching from paper gold GLD to Real Physical GOLD. As worldwide inflation stars to take hold due to printing presses by world government, GOLD will go Parabolic. Company stocks come and go, governments and currencies come and go, but Real Gold keeps going up, Fools Gold will always disappear in the end.

Oct 10 10:53 AM

[Carlos Lam:]

Nothin' but a pathetic attack on gold and on a politician the author doesn't like. If the dollar was such a fine currency, then dollar holders (foreign and domestic) wouldn't be trying to diversify out of the dollar like rats aboard a sinking vessel.

I wonder if the author puts his money where his mouth is and shorts gold.

Oct 10 08:57 PM

[yellowhoard:]

Mr. Blitz,

After reading your article and giving it careful consideration, I've come to the conclusion that you probably don't make much money in the markets and are indeed a malodorous idiot with misogynistic tendencies.

Oct 10 10:07 PM

[Mayascribe:]

SA is like a box of chocolates....

Oct 10 11:01 PM

[Vuke:]

A confusing article by an apparently confused author. For some reason he appears to believe the price of gold should be different in every country.

An odd assertion given that exactly the opposite is gold's fundamental attribute. Gold, as a store of value, holds it own wherever it goes. Even in wild Afghanistan, where paper dollars have often been refused.

Mr.Blitz is a good writer and should undertake a clarification of exactly what he is trying to say.

Oct 11 08:54 AM

[Steve Blitz:]

so my only choice after someone so proud of her ignorance are snake-oil salesmen?


On Oct 09 10:39 AM Screwloose wrote:

> Why are other currencies also slipping against gold?
>
> Try the UK's out-of-control deficit and QE; Japan's staggering 200+%
> of GDP debt level [and declining ability to ever repay it] and the
> Euro's structural flaws/unknowable bank liabilities in Eastern Europe,
> Ireland and Spain.
>
> Your supercilious sniping at Sarah Palin says more about your falseness
> than her honestly-admitted limitations. You'd rather have some slimy,
> fork-tongued, snake-oil salesman; who never strays "off message"
> - because they never actually say anything tangible at all?

Oct 14 08:16 PM

[Steve Blitz:]

i don't disagree with your point on gold, my only point here is that if gold price increase was a defacto devaluation of the dollar then it would take more dollars to buy gold -- in other words gold would be more expensive for dollar-based buyers than buyers in yen or euros. as for your point on dollar depreciation, the problem is really the dollar/yen and dollar/yuan valuation. while we have this euro-centric view on our currency that it's strength reflects our manhood, the asian nations, mercantilist exporters that they are could care less about their currency trading cheap as long as it gives them an edge in pricing their goods and services. shouldn't we?


On Oct 09 12:41 PM Donald Ingram wrote:

> Your article is long on wind and short on movement. It has now been
> proven that the gold price has been/and is manipulated for years.
> Without this manipulation the present price of gold would be much
> higher than is now indicated. The dollars trend is down. There is
> nothing, economically speaking, to reverse this trend, if anything,
> this downtrend will continue. The powers that be want an orderly
> devaluation as can be seen since March 09, conversely a disorderly
> decent would spell disaster for all concerned, and the gold price
> would definitely skyrocket with most everything else, including a
> much higher rate of inflation.

Oct 14 08:22 PM

[Steve Blitz:]

it won't change the competitive advantage if the dollar declines and the yuan cheapens with it. the only thing that happens then is that china ends up holding even more treasurys. everyone knows that the problem is the dollar/yuan and dollar/yen. why do you think there have been so many bilateral discussions with china regarding trade and the dollar? all this talk about keeping the dollar strong and that china was so nice to lend us the money. if the dollar was allowed to depreciate in the 00's our interest rates would've gone up (yes exacerbated by the fed's stupid policy thinking that the currency would adjust to the trade deficit when they knew it wouldn't). the rest of the world wants the dollar strong to preserve the value of their holdings and because a u.s. trade deficit keeps the rest of the world working. why can't all you palin supporters understand how the rhetoric has you supporting what works against our self interest. if the other currencies were allowed to revalue and the dollar gets to a more competitive level so that we have better export performance and import substitution -- how long before the world will be buying our equities (which they do when the dollar goes down) and buying dollar assets because of our economy's performance. comments out of japan and europe the other day pointed up how the strong dollar was killing them. so my fellow americans, this is economic war and we should stop feeding the enemy.


On Oct 09 11:50 AM JeffDB wrote:

> I don't see how you refute Sarah Palin in your attack on her with
> the critique that immediately follows it:
>
> Steve Blitz:
>
> " [she] {Palin} . . . sought to link the dollar decline to rising
> US indebtedness and dependence on foreign oil. “We can see the effect
> of this in the price of gold, which hit a record high today in response
> to fears about the weakened dollar,” she wrote on her Facebook page."
>
>
> "Sarah never misses the opportunity to show that she missed a few
> classes. The huge run-up in indebtedness that precipitated the current
> economic downturn occurred because the dollar was kept too *strong*."
>
> ---
>
> But she never mentioned neither the economic downturn nor the cause
> for it, so how does your critique and analysis back up your apparent
> premise that she's a clueless idiot? It looks to me as if she was
> saying that our dependence on imported oil contributed to our trade
> deficit, and that deficit in conjunction with our rising deficit/debt
> was linked to the declining dollar, fears of further declines in
> turn was linked to the rise in gold prices.
>
> Do you dispute that? If so, on what grounds?
>
> You continue:
>
> "Ms. Palin would get more mileage from her perceived constituency
> if her populist rants focused on Asian nations keeping their currencies
> artificially cheap against the dollar in order to sustain their only
> competitive advantage -- cheap labor and lots of it."
>
> I agree with you about the yuan in particular causing much of the
> trade imbalance, but just prior to that you assert that the devaluation
> of the dollar "goes a long way towards" rectifying that situation:
>
>
> "Looking forward, a weak dollar and high real interest rates hold
> down debt fueled consumption growth and perhaps even generate the
> capital investment led recovery that goes a long way towards rebalancing
> the American economy."
>
> But if the Chinese peg the yuan to the dollar, and the dollar drops,
> so does the yuan. How is that going to change the competitive advantage
> they have via an artificially rigged exchange rate?

Oct 15 09:33 AM