Friday, March 13, 2015

Is Gold really doing that Badly vs. the US Dollar?

The strong rally in the US dollar has many news articles noting that gold is doing poorly vs. the US dollar. While it's true that gold has dropped some as the US dollar has rallied (as it should), the current perception is worse than the actual historical results. Don't believe me?

Let's take a quick look back in time and you will see what I mean. The last time the US dollar index was hovering around 100 where it is now was in 2003 (Feb - April & Sept). You can see that by clicking here to look at this chart of the US dollar index back in 2003. (see it below as well)

So, what was the price of gold back in 2003 when the US dollar index was about 100? The answer may surprise you. Click here to see the average gold price back in 2003. The price of gold averaged around $360 that year (actually a little lower in early 2003).

This is a clear illustration of why you need to follow trends over a long time period. If all you knew about was what has happened in the past year, it might appear as though gold was doing poorly in US dollar terms. But, as you can see, while gold is down some (as it should be), it is nowhere near the much lower price it was the last time the US dollar index as at 100.

What does that mean? It means that overall gold is actually holding up very well in a deflationary environment where the US dollar has made a near parabolic move up. At the same time gold has moved up sharply in other currencies around the world whose value have also been dropping vs. the US dollar (Euro, Yen, Ruble, etc). 

So really, gold is doing what it is supposed to do. If anything, gold is showing unusual strength vs. the US dollar rise based on history. If we get further deflation (something the US Fed does not want), gold may drop a little more in US dollar terms. 

However, this data also tells us that gold is actually in a position to move higher when the US dollar rally plays out. Only this time, it will start from a much higher base price than it did in 2003. If we eventually get the inflation the US Fed wants, gold should move up quite a bit starting from a much higher base.

Added note: Average price for silver in 2003 was $4.65. So both gold and silver are about 3.3 times higher price than the last time the US dollar index as at 100.

Additional added note: Looks like Marketwatch noticed the same thing we did here.

Update: There are so many news events happening right now that in the morning we will just run a recap of them. 

Here's an example of how strange some of them are: 

Can the Putin story get any more bizarre? Apparently it can. USA Today runs this story in which a Russian TV station apparently sends Putin "Back to the Future" by doing a "live report" on a meeting which is not scheduled to take place until next Monday. The report talked in the past tense as if the meeting had already happened. That should put all the rumors circulating about Putin to rest :)

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  1. Shouldn't there be some price adjustment due to inflation since 2003? But you point is well taken.

  2. Yes, that's a good point. I did a calculation using this chart showing average inflation rates:

    I came up with an inflation adjusted price of $465 per ounce using those average rates. So yes, inflation accounts
    for about 12.5% of the difference (using my calculations). But the other 87.5% of the difference is true strength of gold
    vs. the dollar the last time the USDX was around 100. Gold could drop another $500 and still be showing relative strength vs. 2003 pricing. Even if it drops some more from here, it is likely to start its next leg up from a higher base price I think. Also, demand from countries where their currency is falling may help put a floor under even the dollar price of gold (something I suspect has already happened) accounting for the higher base price we see now. I suspect that is why gold did not crater in dollar terms even as the dollar has moved up in near parabolic fashion in recent months.