There’s been a lot of media/Wall St/blog noise about the relative strength or weakness with the U.S. dollar. With respect to gold, the daily vicissitudes of the gold price are associated with the daily price variations of the dollar index. This is incorrect analysis.
To be sure, over longer periods of time, there will be a high inverse correlation between the gold price and the dollar index. But prior to the run-up over $1900 in the current period, the last time the gold price was trading above $1900 was in September 2011. At the time the dollar index was trading in the 70’s.
The investment value of gold
My thesis for devoting the last 20 years to researching, analyzing, trading and investing in gold has been twofold. First and foremost to protect my savings from the ravages of eventual catastrophic policies implemented by the Federal Reserve and the Government. But secondarily, both gold and silver are extraordinarily undervalued relative to the quantity of fiat currency AND fiat currency derived debt circulating globally. As such, both gold and silver have extraordinary investment value.
The graphic above compares the price path of gold and the USDX over the last 12 months. Without question there’s an inverse correlation – over an extended period of time. But from mid-March thru June, gold and the dollar traded almost perfectly in tandem. Since June, gold has risen as much as $400 while the dollar index in the same time is only 300 basis points lower.
In fact, between their respective lows in March and now, gold has soared 31.7% while the dollar index is largely flat.
This latter occurrence is what I call “the investment value of gold.” Gold (and silver) functions both as a wealth preservation asset and a wealth enhancement vehicle. Both metals are singularly unique with these attributes.
Let’s face it. The U.S. technically is insolvent. The only factor preventing collapse, for now, is the willingness of our trade counterparties to continue accepting the dollar for trade settlement. With the continued deterioration in the economic, financial and fiscal condition of the United States and the accompanying escalation in money printing by the Fed, the global acceptance of the dollar will diminish more than it already has over the last 20 years.
At some point the dollar index will quickly revisit the 70 level it tested in 2008. When that event occurs I expect the gold price to be at least double its current level and silver to be pushing $100 (gold/silver ratio below 40 from its current 80).
Buying physical gold and silver – not SPDR® Gold Shares (NYSE:GLD) or iShares Silver Trust (NYSE:SLV) – should be your first priority in seeking shelter from the eventual fate of the dollar. But mining stocks offer the potential wealth enhancement as well “optionality” upside to the prices of gold and silver.