Monday, November 14, 2016

The dollar vs. gold dichotomy: As dollar strengthens it opens door for greater gold buying

As we have mentioned many times before here at The Daily Economist, you should not value gold simply in its relation to the dollar.  In fact, all one has to do is look at countries like Venezuela and now India to know that when a nation's currency loses confidence or value, gold soars to all-time highs in relation to their money.

Of course we in the U.S. quite often are only interested in what happens to things in relation to the dollar, and in many cases rightly so since it still holds the position as the global reserve currency.  But that in itself should not be a deterrent since the recent strength in the dollar has created an incredible buying opportunity for physical gold.

5 Day dollar chart:


One Week Gold Chart:


As you can see in the above charts, in the same period that the dollar climbed 400 bps to over 100 on the index, gold fell to $1216 and its lowest point vs. the dollar in some months.

But here is the catch many gold bugs fail to realize... when the dollar strengthens it means that your purchasing power in that currency is much greater, so you inevitably get more 'bang for your buck'.  It is only when the dollar is collapsing and gold prices are also falling that purchasing gold becomes a losing proposition.

A stronger dollar is bad news for foreign markets as seen by the historic drop in the Chinese Yuan as well as in the Euro and Yen.  And it also means that investors and traders there will be looking towards gold as a safe haven to protect against the devaluing of their currency, which will lead to even greater shortages in gold than we already have today.

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