The Inverse Relationship Between Gold and the Dollar

I think gold will do well long-term. See this and this.

But as I have previously argued, I think gold is surging right now mainly due to weakness in the dollar. See this and this.

Indeed, Nouriel Roubini says that commodity prices have risen largely because of the huge carry trade in dollars, and that - when the carry trade unwinds - there will be a huge crash in virtually all asset classes. And see Tyler Durden's thoughts.

Again, I am bullish on gold in the long-term, but I think there might be a large correction in the short run when the dollar rises.

And contrary to what some people think, I agree with Roubini: the dollar will rally sizably at some point in the not-too-distant future (just like it did during the credit crunch last year), before crashing rather definitively.

Update: Gold and the dollar both rose yesterday, but the rise in gold is being attributed to India's purchase of 200 metric tons of gold.

Author's Note: I am not an investment advisor and this should not be taken as investment advice.

Comments

[Mad Hedge F...:]

bji News broke this morning that, out of the blue, the Reserve Bank of India bought 200 metric tonnes of gold from the IMF for a handy $6.8 billion. The news set the gold market on fire, boosting the December futures $40 to an all time high of $1,088. It is the largest transaction in the barbaric relic since the Alaric’s Visigoths sacked Rome in 410 AD. It has been public knowledge for some time that the IMF was looking to unload 403 tonnes of the yellow metal in order to fund lending to poor countries. Many traders say this threatening overhang is why gold failed to definitively break out to the upside this year, despite six attempts. The expectation was that China would take this hoard as part of a broader diversification away from the dollar. Bringing India into the fray, which had no prior history of stockpiling gold, is a whole new plate of basmati rice. Not only does this raise the prospect of a bidding war with China for more gold reserves, other cash rich emerging market central banks are likely to join the mosh pit as well, no doubt panicked by the ominously rising whirr of printing presses in the developed countries. My short term goal for gold was $1,200, but I now have to raise that to the $1,300 favored by some chartists in view of the new dynamics. If you want to see my long term target, take a look at the chart below, which has gold zeroing in on its inflation adjusted all time high of $2,358. For those who prefer holding the barbaric relic of the physical kind, visit the tightest spreads in town on American Eagles and bullion at www.millenniummetals.net/ . And while you’re there, sign up for their free research product on precious metals.

Nov 04 07:04 AM

[Mr. G:]

Gold is heavily entrenched in the culture and subconscious of the Indian peoples. The recent purchase was unusual and affected the supply demand equation more than the anticipated inflation hedge. I believe the inverse relationship between the dollar and gold will return to normal once this aberration passes. The unemployment rate to be reported may have an influence on gold's direction, particularly if job loss keeps rising. . I always fear the huge downside gold exhibits when the institutional players sell off. Keep your eye on the Friday report for a short term read on gold's direction. GI

Nov 04 08:54 AM