Time To Abandon Preconceptions on Gold and the Dollar?
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.
bullion.directory/time-to-abandon-preconceptions-on-gold-and-the-dollar/
Link to "US Dollar Rally: The Beginning of the End" bullion.directory/us-dollar-rally-the-beginning-of-the-end/
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.
bullion.directory/time-to-abandon-preconceptions-on-gold-and-the-dollar/
Link to "US Dollar Rally: The Beginning of the End" bullion.directory/us-dollar-rally-the-beginning-of-the-end/
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