Dollar vs. Gold
derryb
Posts: 36,791 ✭✭✭✭✭
The US dollar index is the measuring stick that shows the current state of the dollar. An excellent perspective on its recent surge appears in Adam Hamilton's latest essay. Since the movement of gold has in recent years been inversely tied to the strength of the dollar, a good understanding of the dollar's measuring stick is a necessity for the serious stacker:
Strong-Dollar Fallacy
It is important to note that the bulk of the dollar's recent "strength" has been a direct result of the euro's weakness:
"As always, the benchmark of choice for tracking the dollar's fortunes is the venerable US Dollar Index (USDX). Born many decades ago in 1973, it measures the progress of the dollar against a basket of a half-dozen major foreign currencies. Dominating these is the euro, at 57.6% of this index's weight. Next are the Japanese yen, British pound, and Canadian dollar at 13.6%, 11.9%, and 9.1% respectively. It is this heavy euro weighting that has helped fuel the strong-dollar fallacy. Before the euro was launched in 1999, the USDX had ten components with no one commanding a dominant weighting. But when the euro replaced the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc, there was no choice but to change each of these USDX components to the euro."
Strong-Dollar Fallacy
It is important to note that the bulk of the dollar's recent "strength" has been a direct result of the euro's weakness:
"As always, the benchmark of choice for tracking the dollar's fortunes is the venerable US Dollar Index (USDX). Born many decades ago in 1973, it measures the progress of the dollar against a basket of a half-dozen major foreign currencies. Dominating these is the euro, at 57.6% of this index's weight. Next are the Japanese yen, British pound, and Canadian dollar at 13.6%, 11.9%, and 9.1% respectively. It is this heavy euro weighting that has helped fuel the strong-dollar fallacy. Before the euro was launched in 1999, the USDX had ten components with no one commanding a dominant weighting. But when the euro replaced the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc, there was no choice but to change each of these USDX components to the euro."
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
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Comments
Knowledge is the enemy of fear
<< <i>So was it a "weak dollar fallacy" when dollar was going down as a result of the Euro going from 90 to 150? >>
we finally agree!
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>
<< <i>So was it a "weak dollar fallacy" when dollar was going down as a result of the Euro going from 90 to 150? >>
we finally agree! >>
So if gold went up during a weak dollar fallacy, why shouldnt it go down during a strong dollar fallacy?
Knowledge is the enemy of fear
<< <i>
<< <i>
<< <i>So was it a "weak dollar fallacy" when dollar was going down as a result of the Euro going from 90 to 150? >>
we finally agree! >>
So if gold went up during a weak dollar fallacy, why shouldnt it go down during a strong dollar fallacy? >>
It does go down during a strong dollar fallacy. My opinion is that since the weighing of currencies is nothing more than a shift of strength from one to another, currency strength should have no fundamental affect on gold prices. The actual affect that currency valuation has on gold is one of investor perception. This in turn tells me that nothing has changed with the long term outlook for gold prices. Ups and downs based on currency valuation shifts are hiccups.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
But in fact it has, no?
nothing has changed with the long term outlook for gold prices.
Except that it is at historically high valuations.
The problem with gold is that it is difficult to place a value on its fundamentals. One might say that $2000 is overvalued, while another might say it is overvalued. Without any relative valuation measures, gold becomes a risky asset.
And as mentioned in another thread concerning a chicken, gold (being a currency) can be devalued. IE, the amount of goods or services that PMs could be exchanged for, can and probably will fluctuate wildly during extreme situations. Just because an ounce of gold can today buy a cow, doesnt mean it will be able to in a more dire event.
Knowledge is the enemy of fear
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Don't see why that wouldn't be a fair point to use today. If anything it would be extremely conservative considering the amount of off-balance sheet debt
and entitlements that exist out there in addition to simply stated sovereign debts (ie IR and currency derivs, Fannie, Freddie, SS, Medicare, Pensions, corporate debt, state debt, etc.).
While currently gold is at "high" valuations, it has yet failed to reach a 1980 CPI adjusted price. The debt related prices fall into the $7K to $13K range. Valuing gold
just on actual circulating paper fiat is in the $4K range. In 1974 $195 was a "high" price for gold. And at the end of 1976 even $110 gold was still a "high" price compared
to the fixed $35 value seen earlier in the decade.
For the 5th or 6th week in a row the commercials have continued to pile into the long side of the USDollar futures. Now at levels not seen since well before 2008. Dollar net
shorts at 51K with open interest >80K. Short to long ratio at 8.9 and possibly headed back to the 13-14 level seen in late December or early January. At least for the time
being these guys see a weaker USDX. The fallacy with the USDX is that even with the level rising, the currency is being depreciated.