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

One of my readers recently commented that he did not like gold because of the strong dollar. So what? Dollar moves are irrelevant.
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Dollar and Gold charts courtesy of StockCharts.Com annotations by Mish

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.

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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.

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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