Gold Decline Based On False Premise Of Dollar Strength - GLD Will Paradoxically Rise As Russia Rustles

by: Markos Kaminis


Gold and the SPDR Gold Trust ETF (NYSE: GLD) have dropped in kind with dollar priced commodities this week, I believe on false premise.

Strong GDP growth, Federal Reserve monetary policy direction, surging employment costs and the EU's challenge of Russia have all served to support the dollar, and so damaged gold.

However, the move ignores the fact that Russia's leader has had his pride wounded, and in my view will wage dirty economic war against the U.S. economy and the dollar.

The SPDR Gold Trust (NYSE: GLD) has dropped precipitously over the past week. The premise for the decline is dollar strength, supported by a strong GDP growth figure, a higher employment cost index, the European challenge of Russia, and the Federal Reserve direction. But I'm saying that premise is falsely based, because the dollar is not the safe haven the market currently believes it to be. So a buying opportunity is in the offing for gold and relative securities including the GLD ETF.

5-Day Chart of GLD at Yahoo

The case against dollar priced commodities has been a solid one made over the past week. Second quarter GDP was just reported up 4.0%, stronger than the expected rebound of 3.1% predicted by economists. In fact, the result reached the top end of the economists' range for the quarter, according to Bloomberg's survey. So despite its benefiting from pent-up demand amassed through the weather beaten first quarter, it was still impressive growth. It means there's life in the American economy and that means interest rates will rise, and perhaps for good reason. The result is a stronger dollar, and declines in the prices of dollar priced commodities like gold and oil. That's why the iPath S&P GSCI Crude Oil TR Index (NYSE: OIL) fell nearly identically to the GLD security this week.

5-Day Chart of OIL at Yahoo

Take note also of the path of the PowerShares DB US Dollar Bullish ETF (NYSE: UUP). You'll note it contrasts nearly perfectly against the downward action of commodities.

5-Day Chart of UUP at Yahoo

But the GDP data was not the only factor behind the dollar's gains this week and the declines of gold and oil. The Federal Reserve also cited economic recovery as its reasoning for reducing its asset purchases en route to the planned October end of the program. I have already warned that rate hikes could come as soon as March of next year (that's my forecast). Unfortunately the Fed also warned that sub-2.0% inflation appears to be a historic phenomenon that won't last. That lent support to interest rates and strengthened the dollar, and so diminished gold and the SPDR Gold Trust . Precious metals relative securities have all had a rough time of it this past week. You'll note the exaggerated drop of the Direxion Daily Gold Miners Bull 3X Shares (NYSE: NUGT) is due to its leverage.

Metals Relative Security

July 25 - 31

SPDR Gold Trust


iShares Silver Trust (NYSE: SLV)


Market Vectors Gold Miners (NYSE: GDX)


Direxion Daily Gold Miners Bull 3X Shares


The inflation fire got further fuel added to it when the Employment Cost Index was reported Thursday. Compensation costs for civilian workers increased by 0.7% for the second quarter. Compensation costs were up 2.0% for the 12 months ending in June. This is a key inflation measure that often keys Federal Reserve rate hikes, and so it spurred further dollar and interest rate gains this week and drove down gold prices and the GLD.

So why is the premise faulty? I believe the premise is faulty because it ignores Russia. In fact, I suppose the Russia factor actually contributed to dollar strength this week, since the EU imposed sanctions on Russia. If the EU stands up to Russia, there's a decent chance Russia will respond. Russia has the capability to impact Europe much more significantly than it can the United States. If Russia chooses to fight an economic war against Europe and the euro, the market supposes the dollar is left behind as a safe haven and capital beneficiary. That might have been so if the U.S. were not also in the crosshairs of one pride-pummeled Vladimir Putin.

Just yesterday I said the SPDR Gold Trust would benefit from the tense situation between Russia and the West. I maintain that position despite the decline in the GLD over the last week, and despite all the economic evidence against gold. It's a naïve assumption to assume Russia will target the euro and serve the dollar in the process. First of all, if Russia engages in an economic war with Europe, the U.S. suffers along with all global commerce. In today's interconnected world, there is no safe haven, save mankind's fall-back currency, gold. And make no mistake about it, Putin will not take action that strengthens the U.S. He will foment discord and chaos and undermine us wherever he can in my opinion. So, I would use this weakness to add to gold positions and continue to recommend the SPDR Gold Trust for medium to long-term interests.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.