An Historic Look At the Gold/Dollar Ratio

With Gold making 52-week highs on a daily basis and the US Dollar making 52-week lows, below we highlight a chart of the two going back to 1975. As the chart shows, the two move in the opposite direction of each other most of the time. Gold made its all time high of just under $850 back in January 1980 only to quickly reverse and move sharply lower.

While Gold currently remains about $100 below its all-time highs, the ratio of Gold versus the US Dollar index is much closer to all time highs (2nd chart below). Most people seem to believe Gold will continue higher and the Dollar will go lower, but contrarians have a pretty compelling case based on these charts as well.

click to enlarge

Comments

[jayz:]

This is nothing more than saying dollar is at historical low. But the question is would it go lower? It can. If that happens, then the amount of dollar it takes to buy gold will rise, simple as that.

2007 Sep 22 11:49 PM

[jayz:]

Your equation is not "dollar neutral", on the contrary, it is "Ultra" short dollar, also keep in mind that dollar already broke the historic support.

2007 Sep 22 11:53 PM

[dd:]

Further to JeffZ's comments:

When two variables have a significant negative correlation (and a strong theoretical basis for it), then any ratio or comparison of the two should use the inverse of one variable.

There is no reason to expect a ratio of negatively correlated variables to be stable over time.

2007 Sep 23 09:58 AM

[EE:]

If you look at the gold /silver ratio and are familar with Ted Butler, you will put $ in silver. Gold could stagnate in the near $800-$900 range while silver more than doubles due to lower & lower inventory and short covering. The extra low $ will cause other fiat currancies to stop raising rates and also lower them and Europe will buy gold as most currancies devalue against China. HI,HO Silver...Away!!!! To read Butler go to investmentrarities.com & silver up 2 profit

2007 Sep 23 10:44 AM

[milo:]

Interesting chart. The assumptions would be correct except for adjustments for inflation.

nowandfutures.com/infl...

Compare to these charts which adjust for CPI and Alternate CPI from John Williams.

2007 Sep 23 01:49 PM

[hatlau:]

The comparison is very misleading. The US dollar in 1979 has lost 70% after 28 years

2007 Sep 23 01:56 PM

[mashny:]

Absolutely true. I just read an article saying that, adjusted for 1979 dollars, the value of gold would have to rise to about $2,200 per ounce to equal the value it had back then. So, potentially, we have a long way for gold to run.

2007 Sep 24 03:30 PM

[DaveyH:]

It would be instructive to see US Treasury rates (10 or 30 Year) plotted as well on the dollar index vs gold chart.

2007 Sep 23 08:35 PM

[Sr. Pessimist:]

I even question the value of gold itself. One way or another, it's difficult to gauge just how bad the economy is really doing.

2007 Sep 24 01:09 PM

[oldcrow:]

The second chart apprears to be the same as the first depicting the Dollar Index.

2007 Sep 25 02:58 PM

[billy the kidd:]

What a ride, wow, I think that the Butler bunch would be chompin' at the bit, but captain contrarian rides to the rescue

2007 Oct 13 09:08 PM

[billy the kidd:]

silver will be back !!!

2007 Oct 13 09:09 PM

[jgfox:]

I'm a Gold newbie and I am studying the Gold mining capablities of the larger companies.

The dollar is still sinking. Extracting and refining ore to get gold is more expensive. Barrick, the largest gold mining company, said in its 2007 report that their average "full" cost of producing 1 oz of gold was $412/oz.

The minimum price of gold to sustain production effort would have to be at least $100 above the cost to extract it.

To meet the rising demand, use of low yield ore will be requried ... hence, rising costs of production.

Energy costs up, capital costs up, environmental restrictions higher, political instability ... and world demand soaring, since new market instruments simplify the purchasing and storing of gold ...ETF's.

I'm putting a good chunk of my retirement monies into gold. And I'm a very conservative investor and only own a limited amount of stocks.

Princeton Junction, NJ

2008 Mar 08 01:52 PM