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Over the course of last month, we noticed an occurrence that many in the mainstream media say is not possible. The dollar index and the gold price both went up. We would like to explain this and some of the many misrepresentations about gold. Here is the chart:
The left side (green line & orange arrow) is the dollar index (DXY), and the other data is gold.
Late in June we entered the present period of increasing worry over the global economic reality combined with a lack of conviction over further printing. This mindset is a result of a lack of understanding, combined with consistent and effective hesitance on the part of central bankers to admit to inevitable future expansion.
The reality is that the dollar index and the gold price are related and have inversely correlated over shorter periods, but the fact remains that they are driven by quite different inputs.
The dollar index (DXY) is a basket of other paper currencies, of which 60% is the euro. So when the euro is up, the DXY is down. Recently algorithms have been programmed to “think” that if the euro is up, printing is viewed as likely (prolonging the life of institutions), and gold and stocks (being hard assets) would benefit.
Additionally, as the euro comes under fundamental pressure (realization that the fiscal situation is worsening), the rush for dollars is real, and the value placed on them is higher. As gold (and not the dollar index) is what accurately measures value, or the true “price of the dollar,” gold falls in price as a short-term demand for dollars raises the value of dollars, such as in the initial impacts of 2008.
As for gold, it has been a winning “trade” for big firms for years, and in a period such as in 2008, when other assets are deep in the red, gold is sold to gain immediate cash.
As experience shows us, this is a short-term effect, because as the firms assess the situation, they come to the realization that central banks will re-inflate to offset the sharp deflation that threatens the solvency of systemically-critical institutions (think AIG, JP Morgan, Bank of America...).
Answer this: since the beginning of the crisis, on net, has gold or silver performed well?
According to Alf Fields, a technical analyst:
Which way is this market going to break when the lines converge? Up or down?
Is this the end of the almost 100-year bull market? We finally have eliminated the deficit and are reducing debt? Because eliminating the deficit and reducing debt is the only path to a fundamentally stronger dollar.
Or is the debt ceiling about to be hiked again, adding over a trillion a year to the debt? The healthcare act was passed, which will worsen overall debt accumulation soon as well. As a nation, are we actively seeking to reach our budget goals, as outlined here by the current administration?
We give a detailed explanation in Why Buy Gold Now? of the three reasons it will take more of the Federal Reserve’s dollars in the future to buy the same ounce of gold:
Bankers Fighting Deflation
- Dollars are diluted by expanding supply (inflation).
Rate at Which Gold is Adopted Defines (Gold) Demand
- Deciding to own gold as money and savings, limiting dollars held increases dollar supply relative to the remaining smaller pool of dollar users.
- Fundamental demand is unlimited (when gold is viewed as money).
Loss of World Reserve Status
- Less demand for dollars will mean less value in each unit.
- China has been importing serious amounts of gold in 2012 (more than the U.K. or Portugal have in total holdings).
While we can lay out just how gold will continue the rise to the stars, the reality is that gold is not moving; rather the price of gold reflects the fact that the dollar is falling in purchasing power. On top of that, history is, of course, on our side as well. Gold has outperformed the dollar (been in a bull market) since the Fed first co-opted the dollar name back in 1913 when congress gave it a monopoly to create banknotes as the “official” currency. Then it took 20 dollars to buy an ounce of gold. The dilution of the dollar accelerated after the peg to gold was removed in 1971. This short GoldSilver article shows us some of the clearest charts that illustrate this point.
While we deflate at 100 billion a month, we come closer and closer to the point at which central banks need to step in and re-inflate (more Quantitative Easing, or QE). While the frequency and size of inflation needed will increase, the common mistake today is to assume this is new, or a one-off event needed to fix a one-off crisis. The opposite is true; there has always been an long-term trend of increasing the supply of money and credit (inflation), for that is how the system is designed to work.
The Fed issues a dollar, on which a dollar plus interest is owed. This math is beyond refute, and history corroborates. It is in the later stages of this formula that action grows necessarily more frequent and larger. New names for expansion of supply (such as QE) help to underpin this fallacy, and lead to the price action we see today in gold and silver. One step back, then three forward.
Finally, we would remind readers that, not only in 2008, but also the deflation in the depression of the 1930’s took gold up 75% for those who saved in the coins. Would you like 75% more wealth at the snap of a finger? That is what happened when the dollar was devalued by then President Franklin D. Roosevelt, an effective re-inflation used to offset the deflation. And just one example of one of the three reasons above to buy and save in silver and gold right now.
Over the course of last month, we noticed an occurrence that many in the mainstream media say is not possible. The dollar index and the gold price both went up. We would like to explain this and some of the many misrepresentations about gold. Here is the chart:
The left side (green line & orange arrow) is the dollar index (DXY), and the other data is gold.
Late in June we entered the present period of increasing worry over the global economic reality combined with a lack of conviction over further printing. This mindset is a result of a lack of understanding, combined with consistent and effective hesitance on the part of central bankers to admit to inevitable future expansion.
The reality is that the dollar index and the gold price are related and have inversely correlated over shorter periods, but the fact remains that they are driven by quite different inputs.
The dollar index (DXY) is a basket of other paper currencies, of which 60% is the euro. So when the euro is up, the DXY is down. Recently algorithms have been programmed to “think” that if the euro is up, printing is viewed as likely (prolonging the life of institutions), and gold and stocks (being hard assets) would benefit.
Additionally, as the euro comes under fundamental pressure (realization that the fiscal situation is worsening), the rush for dollars is real, and the value placed on them is higher. As gold (and not the dollar index) is what accurately measures value, or the true “price of the dollar,” gold falls in price as a short-term demand for dollars raises the value of dollars, such as in the initial impacts of 2008.
As for gold, it has been a winning “trade” for big firms for years, and in a period such as in 2008, when other assets are deep in the red, gold is sold to gain immediate cash.
As experience shows us, this is a short-term effect, because as the firms assess the situation, they come to the realization that central banks will re-inflate to offset the sharp deflation that threatens the solvency of systemically-critical institutions (think AIG, JP Morgan, Bank of America...).
Answer this: since the beginning of the crisis, on net, has gold or silver performed well?
According to Alf Fields, a technical analyst:
The
bottom line is that we now have a really strong probability that the
correction which started at $1913 on 23 August 2011 has been completed
both in terms of Elliott waves and also in terms of time elapsed. If
this is correct, the gold price should soon be expressing itself in
violent upside action as it moves into the third of third wave which is
still targeted to reach $4500
Which way is this market going to break when the lines converge? Up or down?
Is this the end of the almost 100-year bull market? We finally have eliminated the deficit and are reducing debt? Because eliminating the deficit and reducing debt is the only path to a fundamentally stronger dollar.
Or is the debt ceiling about to be hiked again, adding over a trillion a year to the debt? The healthcare act was passed, which will worsen overall debt accumulation soon as well. As a nation, are we actively seeking to reach our budget goals, as outlined here by the current administration?
...another
crisis down the road as our interest payments rise, our obligations
come due, confidence in our economy erodes and our children and
grandchildren are unable to pursue their dreams because they are saddled
with our debts. That's why today I am pledging to cut the deficit we inherited by half by the end of my first term in office... That means taking responsibility right now in this administration, for getting our spending under control.
The
jaw-boning politicians will talk (such as the quote above) about
serious reductions in spending (true austerity), especially with Paul
Ryan in the news. This has not proven to be reality, as the monetary
system itself can not stand a reduction in debt (deflation), but rather
must expand debt (re-inflation) in order to survive. Even under a
magically implemented Ryan plan, the U.S. would remain in deficit for
years and years and years. During this time the debt and the debt
ceiling will need to rise higher and higher. War, or government spending
(healthcare) or housing stimulus--or all three--will bring debt to even
higher highs. We give a detailed explanation in Why Buy Gold Now? of the three reasons it will take more of the Federal Reserve’s dollars in the future to buy the same ounce of gold:
Bankers Fighting Deflation
- Dollars are diluted by expanding supply (inflation).
Rate at Which Gold is Adopted Defines (Gold) Demand
- Deciding to own gold as money and savings, limiting dollars held increases dollar supply relative to the remaining smaller pool of dollar users.
- Fundamental demand is unlimited (when gold is viewed as money).
Loss of World Reserve Status
- Less demand for dollars will mean less value in each unit.
- China has been importing serious amounts of gold in 2012 (more than the U.K. or Portugal have in total holdings).
While we can lay out just how gold will continue the rise to the stars, the reality is that gold is not moving; rather the price of gold reflects the fact that the dollar is falling in purchasing power. On top of that, history is, of course, on our side as well. Gold has outperformed the dollar (been in a bull market) since the Fed first co-opted the dollar name back in 1913 when congress gave it a monopoly to create banknotes as the “official” currency. Then it took 20 dollars to buy an ounce of gold. The dilution of the dollar accelerated after the peg to gold was removed in 1971. This short GoldSilver article shows us some of the clearest charts that illustrate this point.
While we deflate at 100 billion a month, we come closer and closer to the point at which central banks need to step in and re-inflate (more Quantitative Easing, or QE). While the frequency and size of inflation needed will increase, the common mistake today is to assume this is new, or a one-off event needed to fix a one-off crisis. The opposite is true; there has always been an long-term trend of increasing the supply of money and credit (inflation), for that is how the system is designed to work.
The Fed issues a dollar, on which a dollar plus interest is owed. This math is beyond refute, and history corroborates. It is in the later stages of this formula that action grows necessarily more frequent and larger. New names for expansion of supply (such as QE) help to underpin this fallacy, and lead to the price action we see today in gold and silver. One step back, then three forward.
Finally, we would remind readers that, not only in 2008, but also the deflation in the depression of the 1930’s took gold up 75% for those who saved in the coins. Would you like 75% more wealth at the snap of a finger? That is what happened when the dollar was devalued by then President Franklin D. Roosevelt, an effective re-inflation used to offset the deflation. And just one example of one of the three reasons above to buy and save in silver and gold right now.
