Historically, gold and the US dollar move inverse of each other. Time to abandon this preconception?
The US dollar is going strong, but is it time to change the preconception that a strong US dollar is automatically bad for gold? Perhaps. The inverse relation has historically occurred, but in times of uncertainty, the inverse breaks and gold typically remains on top.
BlackRock’s Russ Koesterich, CFA, gives the inverse relationship the benefit of the doubt in Market Realist’s “Why Gold and the Dollar Move in Opposite Directions.” Koesterich goes to say that a strong dollar is bad for gold because it makes the commodity more expensive – this is true in relation to gold priced in any currency. The article also points out to the assumption that the Federal Reserve “may” raise rates, which is also is positive for the dollar, bad for gold. Conversely, this is one of the reasons I believe the Fed won’t raise rates. Deflationary pressures will continue to raise, and that is opposite of the Fed’s intentions.
Under normal circumstances, the inverse relationship of the two make sense. However, this is a time in history not seen before. Central banks are omnipotent, and their modus operandi is currency debasement. Gold priced in euros just reached a 21-month high, following the European Central Bank’s quantitative easing announcement; and gold priced in yen has been an amazing trade during the Bank of Japan’s kamikaze monetary policies.
But, the dollar is rising, not falling, right? True. The question is not why gold should fall given the strong dollar. The real question is “why is gold not falling given a strong dollar?” It’s simple: gold is a central bank hedge. The ultimate currency hedge. Furthermore, the performance of the dollar – although not new – is not normal. Up over 20 percent since the parabolic move first began, these moves are often foreshadowing destruction of capital which quickly follows. In “US Dollar Rally: The Beginning of the End,” I outlined three previous times the dollar rose by at least 20 percent: 1988-89, 1999-2001 and 2007-9. Each move was followed by double-digit declines of at least 16 percent in the US dollar index. In addition, the last two descents took equities down with it – the “tech bubble” and the “Great Recession.”
Omens are lurking as the dollar and gold relationship is mirroring that of 2008.
In the above mentioned article, Koesterich presented a graph showing gold and the dollar. Notice January’s decoupling of the US dollar mirrors that in January 2010, following the Fed’s implementation of quantitative easing. So, is more easing from the Fed coming? Likely, and it’s more likely than a meaningful rate hike by the Fed.
Gold rose significantly in the dollar collapse in 2000-01 and 2007-09. During the Great Recession, gold was further boosted by the Fed’s ill-fated QE attempts. You do not need inflation for strong gold gains, you just need central banks to remain in business. It is important to rethink common ideologies on investing because markets are dynamic and ever-changing.
This is why both fund managers and retail traders are slaughtered in epic market collapses. They fail to evolve along with financial markets, continuously trying to fit the round peg in a square hole with the square peg in plain site.
Your plan is logicall but its based on incorrect observations, so --- it's wrong.
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The question is not why gold should fall given the strong dollar. The real question is “why is gold not falling given a strong dollar?”
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It falls. And it falls indeed alot :) And falling is still to come. $800 is my projection for Gold.
Gold started falling from the moment the dollar started to rise. It started to rise (hit the bottom) at April 2011. Make the correlation of the price of dollar and the price of gold with this trend: google.com/trends/explore You will notice the techical divergencies on the santiment, on the fear, on the expectations, on the price quotes itself. Puzzle fits perfectly. At present there are NO Dollar bearish divergencies of any kind. No exhaustion on the dollar uptrend of anykind. No gold or silver shortages of any kind also. Gold to drop much further and immediate. I increased my short position on Gold last week. Dollar to sky rocket much further and immediate, 113 is first target. Christine Lagarde: monetary policies of the central banks around the world are out of sync. Monetary stimulus on EUR and JPY ineffective, so they they will further increase it which will cause further Dollar Storm. Only Dollar based QE makes some effect on world economy. Its like the wheather, when wind blows from high pressure zone to low pressure zones. The moment of reverse will be when Fed resumes its QE and that will happen when Europe and Japan start asking for help. It will be played out publicly like a theatro for the public. Then US will resume QE with the justification: The world economy needs equalizing of the monetary policy because it is out of sync, hoping that it will not trigger dissapointment that there will be QE infinity. But we all know there is no way besides QE infinity, so we just wait for the wind and ride it. Do it yourself too. Prognosis: Gold will be ready for buying and for a second top, right after US QE resumption. also whatch the shortages on the precious metals. It's very good indicator. There also gonna be a "topping" of the dollar. Now we are still long away from that moment. They simply will not act so early and without first giving to the public gradual signs for it. They will not act because that will scare the s...it out of the markets and cause freaking volatilities. They will wait slowly the santiment to adjust to it.
CommoditiesTrader
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Lol, right. And you gold project has been wrong. So, I guess where both wrong. Then again, I got almost a decade of experience and look at these things on a daily basis. Hey, everyone thought 2007 would continue indefinitely. Dollar didn't show signs of slowing down then and boy did it.
You assume that the puzzle will always got perfectly. Just one missing piece and it all comes down.
Furthermore, please don't make assumptions given one idea. I have been publishing that the dollar will likely trend higher till the Fed weakens it. If you thought the SNB decision was grand, you'll really be in for a treat :)
Patladj.
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I think the dollar explosions was not strong enough. Oil didn't move either. Gold drop was not as violent as I thought. I think there might be some issues and news from Saudi Arabia regarding the petrodollar support. Watch out. Possible reversal comming with a strong reaction on a news.
That is a possibility. I never say never. It's just funny how basically all data out of the US has been extremely poor but, amazingly, NFPs are always a blowout that saves the day. Sub-$1,000 I don't know. I think it will be one large trade range until economic sentiment finally breaks.
CommoditiesTrader
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I don't think the dollar's move up with be stopped unless the Fed stops it. Remember, only part of the bullishness is the false narrative that the Fed will raise interest rates.
Keep in mind, the dollar strength is a reaction to easing by the ECB and BoJ
jangseohee
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Don forget... every central banker are looking at their technical chart on how to kill others :-)
CommoditiesTrader
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Fed is last to the game, which is why the next round of QE will be big!
jangseohee
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QE4? Operational Twist 2?
CommoditiesTrader
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They won't go to assets, I don't think. Probably large tax cuts or rebates for middle/low income individuals in an attempt to spend. They'll spend it.. on debt reduction! I'm not really sure because it is likely the economy will hit the shitter with the Fed funds under 50-75 bps. They will effectively have no "tools"
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The question is not why gold should fall given the strong dollar. The real question is “why is gold not falling given a strong dollar?”
=============
It falls. And it falls indeed alot :) And falling is still to come. $800 is my projection for Gold.
Gold started falling from the moment the dollar started to rise. It started to rise (hit the bottom) at April 2011. Make the correlation of the price of dollar and the price of gold with this trend: google.com/trends/explore
You will notice the techical divergencies on the santiment, on the fear, on the expectations, on the price quotes itself. Puzzle fits perfectly. At present there are NO Dollar bearish divergencies of any kind. No exhaustion on the dollar uptrend of anykind. No gold or silver shortages of any kind also. Gold to drop much further and immediate. I increased my short position on Gold last week. Dollar to sky rocket much further and immediate, 113 is first target. Christine Lagarde: monetary policies of the central banks around the world are out of sync. Monetary stimulus on EUR and JPY ineffective, so they they will further increase it which will cause further Dollar Storm. Only Dollar based QE makes some effect on world economy. Its like the wheather, when wind blows from high pressure zone to low pressure zones. The moment of reverse will be when Fed resumes its QE and that will happen when Europe and Japan start asking for help. It will be played out publicly like a theatro for the public. Then US will resume QE with the justification: The world economy needs equalizing of the monetary policy because it is out of sync, hoping that it will not trigger dissapointment that there will be QE infinity. But we all know there is no way besides QE infinity, so we just wait for the wind and ride it. Do it yourself too. Prognosis: Gold will be ready for buying and for a second top, right after US QE resumption. also whatch the shortages on the precious metals. It's very good indicator. There also gonna be a "topping" of the dollar. Now we are still long away from that moment. They simply will not act so early and without first giving to the public gradual signs for it. They will not act because that will scare the s...it out of the markets and cause freaking volatilities. They will wait slowly the santiment to adjust to it.