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US Dollar Fluctuations Have No Meaningful Impact On the Price of Gold

May 11, 2022

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5:00 pm

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24 comments

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Economics

Dollar and Gold charts courtesy of StockCharts.Com annotations by Mish

Dollar Movement is Irrelevant

“Gold is getting hammered by the rising dollar. Sinking like a rock!” said another reader.

Sinking like a rock. How funny.

Repeat after me, US dollar moves are irrelevant to the price of gold over any meaningful time frame.

I drew a horizontal line with the US dollar index at 87.5 to get enough data points for comparison. If you prefer another level, be my guest and try it.

Gold Prices at US Dollar Index Level 87.5

$500
$800
$1200
$1350
$1900

Gold was also at $1900 at an dollar index of 103.

In 2005, gold and the dollar both strengthened for a full year.

People believe easily refuted nonsense because the talking heads repeat it every time the dollar strengthens and gold drops.

Technically Speaking

There is a huge, bullish, decade-long cup and handle formation on gold.

The pattern is not reliable in bear markets, but I expect this one to ring the bell because this is a bull market.

Lets discuss why.

Gold Drivers

Gold is not an inflation hedge except in extreme cases, notably hyperinflation.

The price of gold fell from $850 to $250 between 1980 and 2000 with inflation every step of the way

Rather, gold is largely a function of faith in central banks, especially the central bank of the major reserve currency country.

Gold fell from 1980 to 2000 as there was great faith in Fed Chair Alan Greenspan, then considered the “great maestro”.

Gold typically gets clobbered in periods of disinflation when other assets are performing well.

Gold vs Faith in Central Banks

Gold chart from St. Louis Fed, annotations by Mish.

I have posted that chart before and have not updated it for a while. Also, I am running out of room for notes.

But hopefully I have made my point. The amount of nonsense spewed over gold is staggering and it’s repeated nearly every day.

Is Everything Under Control?

No one can tell you where gold, stocks, or Bitcoin is headed, and I won’t either because I don’t know.

But I can suggest what a key driver of gold has been historically speaking. On that score, I like my chances.

This post originated at MishTalk.Com.

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24 Comments

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Oldest Most Voted

Esclaro

4 years ago

Gold and the miners are getting annihilated today as the USD powers upward. When you look at Mish’s chart you have to see that the whole time gold was rising to its high, the dollar was sinking. Now the mighty dollar is getting its revenge. We could see gold at $1500 again.

wmjack50

4 years ago

Since JP Morgan and probably others have been convicted of manipulating the price of silver—why not other precious metals also?

I think gold gets suppressed in price by those in control (FED) to quiet alarm bells as inflation rages and the FED looses control of the dollar’s purchasing power

Dr. Odyssey

4 years ago

As I posted earlier…

My observation is that gold is within $200 dollars of a 2,600 year high.

Global central banks hold over 30,000 tons of gold on their balance sheets.

I think of gold not in the term of generating income, but as insurance.

taperwood

4 years ago

Gold is forming a cup and handle. I said gold would retreat to the 1200 level and it did. I now say my gold sell point is 2850 with 80 silver. I am confident these price points will be reached.

KyleW

4 years ago

I think gold is an inflation hedge, even when it’s not hyper inflation. If the money supply is increasing faster than the gold supply, why wouldn’t it be an inflation hedge? I understand valuations can go in the opposite direction of supply, but it’s still an inflation hedge.

vanderlyn

4 years ago

gold has been art and jewelry and religious icons(crosses and much more) for most of recorded time, and melted down for bad times when the kingdoms F up. been this way for thousands of years. 21st century ain’t no different. we’ll be digging up dead bodies for fillings again in future. gold is money. all others is currency. and gold is many times not even money. it’s a magical thing. art to money to art again. ain’t hard science here. very soft science.

Captain Ahab

4 years ago

Let’s call gold for what it is:

1) a bet on bad news,

2) a hedge against jumping off the ledge,

3) acclamation for those non-Keynesians who believe printing money has never (truly) solved an economic problem.

4) a vote those ex-Goldman people who run the Fed as insurer of first resort for their Wall Street buddies

Scooot

4 years ago

Agreed in the long run Gold will do it’s own thing against all currencies. Recently however it’s mostly dollar strength causing the gold price in dollars to fall. EG Sterling has fallen a lot against the dollar as well but Gold in Sterling terms is higher today than it was in early March.

Eighthman

4 years ago

What is the deal with gold anyway? With weaponized reserves and hot inflation, it should be $3K, easy.

I can only suppose that the fractional gold paper system actually works to keep it down. Or does China have a way to prevent that, as a market operator?

TheCaptain

4 years ago

Reply to Eighthman

Don’t look a gift horse in the mouth. Stop putting into government controlled retirement accounts and use the cash to become your own central banker.

shamrock

4 years ago

Reply to Eighthman

How are you valuing gold? If you assume at some point it backs the dollar then I think you can do a calculation, something like $200,000 per ounce. Otherwise it has no valuation, no p/e, no dividend, nothing.

Esclaro

4 years ago

Reply to Eighthman

The bullion banks have an infinite supply of paper gold that they sell to drive the price down. They don’t have the physical gold to back it up but they don’t have to have it. They just create it out of thin air! The situation is even worse with silver. The precious metals markets are completely manipulated.

shamrock

4 years ago

Gold is down 10.5% from the March Russian invasion high, and miners are down 25-30%.

Jmurr

4 years ago

Reply to shamrock

But it is up 1% ytd which is far better than -16% for soy and 26% for nasdaq.

shamrock

4 years ago

Reply to Jmurr

That’s a pretty short time frame. How about 10 year return, which is sort of the gold standard, lol. Gold up 3%, s&p500 up 200%. Gold is a bet on bad news and hyperinflation.

Doug78

4 years ago

If you believe gold will increase in value then by all means buy paper gold. If you believe the end of civilization is near then paper gold will have no value so you should buy physical gold which by the way is much more expensive for individuals than the price quoted in the market which is the paper gold price. I don’t think civilization will fall so I look at gold as a paper asset with less legal guarantees than a stock or a bond. My objections to gold are not that I think it has no worth. My objections is that paper gold does not have a special place that gives it worth more than any other paper asset. If you think it will go up then buy it like you would buy copper or palladium or corn for that matter. You are only buying the paper (electronic) and not the underlying.

Bam_Man

4 years ago

Reply to Doug78

So you don’t believe that physical gold has special characteristics that give it more worth than any paper asset.

I would agree with you, but only to the extent that you actually have physical possession of the stock and bond certificates of those “paper” securities that you own. If not, then they are held in “street name” and could have been lent out to third parties without your knowledge or permission. So much for your “ownership”.

Doug78

4 years ago

Reply to Bam_Man

Stock and bonds are paper assets that, if civilization continues, have definite legal rights and I think you would agree. They can be loaned and so forth but it that bothers you you can keep them in your own name if you so desire. Just check the appropriate box. The legal guarantees are there and they are strong guarantees as long as civilization doesn’t fall of course. That is why you have never heard that when a broker fails in the US of in developed countries the securities in the client accounts do not disappear. They are transferred to a healthy broker or bank. Paper gold on the other hand depends on the organization who guarantees your holding. In the US and similar countries there are strict regulations as to ownership of the underlying so there is some measure of protection but there are also paper gold funds and ETFs that use leverage to an unknown extent to the individual investor so the notion of who really owns the gold can be abstract. In some overseas investments the regulation and control can be so lax as to be meaningless.

KidHorn

4 years ago

Reply to Doug78

Physical gold isn’t much more expensive than spot. You typically pay about 5% above. The broker has to make a living.

Doug78

4 years ago

Reply to KidHorn

That depends if you are buying coins or bars. It also depends on the demand at the time for physical gold and the supplies of physical gold available at the broker. The difference of price between physical gold and paper gold depends and when you buy it.

Captain Ahab

4 years ago

Reply to Doug78

My favorite gold ETF is PMGOLD–issued by Perth Mint in Australia. Gov’t audited and guaranteed, and redeemable in physical at a small premium. It used to trade in the USA as AAAU (with the same conditions) until Goldman took it over and changed the ETF to London vaults.

Mish

4 years ago

Reply to Captain Ahab

I like OUNZ

Backed by physical

Jack

4 years ago

Reply to Captain Ahab

I buy MNT.TO you are buying real gold from Royal Canadian Mint, safeguarded in the mint vaults.

Esclaro

4 years ago

Reply to Doug78

Paper gold is not worth the paper it’s printed on. It’s a sham to allow the bullion banks to commit fraud on a grand scale.

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US Dollar Fluctuations Have No Meaningful Impact On the Price of Gold

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