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« Gold Will Balance The Balance Sheet Of The Transgressors | Main | Bite The Emotional Restraint Bullet »

Gold and the US Dollar

The printing of more paper money usually has the effect of debasing or diluting the strength of that particular currency. The lowering of interest rates also renders a currency less attractive to investors as better returns might be available elsewhere. The demise of the US Dollar can be attributed, in part, to both of the above reasons. However, when this debasement is plotted against other currencies as per the US Dollar Index we can see that it is having some difficulty when it comes to heading lower as the chart below depicts.

The reasons for this is that the US Dollar Index is made up of a basket of currencies who in themselves are not static and indeed are involved in various forms of debasement having taken the view that a weaker currency will boost their exports. Japan for instance has recently elected a new government whose mandate is to avoid deflation by printing more paper money in order to boost their economy and to increase exports via a cheaper Yen. As we write the European Union are meeting to discuss the strength of the Euro and the effect that it is having on their ability to export goods. As each nation adopts similar policies the result could be a kind of gridlock as every action taken to weaken ones currency is neutralized by a similar action taken by the competing currencies. So we can see that despite Operation Twist and Quantitative Easing, the US Dollar is sitting at the ‘80’ level on the Index.

Gold tends to have an inverse relationship with the dollar and has increased when the value of the dollar has declined. Similarly as the Japanese Yen declined gold prices reached a record high when purchased with the Yen.

So if the actions of our political masters are copied across the board we could find ourselves in a situation whereby the dollar trades within a limited range for some time to come thus capping an advance in gold prices, at least in dollar terms.

One would think that with all this paper money swamping the world we would experience a huge leap in inflation, which is contrary to what the ‘official’ figures suggest, in that inflation is under control.

This leads to us to conclude that for now the demise in the dollar is on hold and that inflation is having little effect on the price of gold. I have difficulty believing that inflation will not come roaring back but for now we have to deal with what we have. If gold prices are to head north then it will be because of the fundamentals for gold; supply and demand. Consideration should be given to central bank purchases, the Russian and Chinese imports, the demand for physical gold as oppose to paper gold, various mints running out of products to sell, the reduction in available scrap metal, the ever increasing difficulties in mining and the lack of new major discoveries. All of which suggests support for gold prices in the longer term, however, the short term outlook is, as always, subject to volatile oscillations in both directions. With this in mind we need to proceed gently with our positioning in the precious metals market place and also be prepared to weather the storm if and when it materializes.


Take care.


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Reader Comments (2)

Call me a nut. I don't care.

I believe in conspiracies.

This paper gold fractional reserve gold price is being manipulated on a daily or near daily basis to keep the Comex price from rising and signalling trouble in moneyland as they...all central banks...conjure boatloads of new currency from nuthin', So, I would simply disregard the Comex gold price and buy as much as you can as often as you can. I believe the Comex price is meaningless in terms of indicating true supply and demand for actual gold. The Comex is no longer about price discovery. It's JPMorgan's playground, and since JPMorgan and the Fed are effectively the same entity with two different public faces, it's the Fed's playground. This is the London gold pool part two.

The Comex price is only meaningful in terms of psychology. That's why they go to great lengths to suppress the price. Don't be hoodwinked. They want to scare us away from the metals.

On another score, the amount of new supply, whether from scrap or mine output, is inconsequential when it comes to price movement. Why, because virtually all the gold ever mined is still around and available. (Not so at all for silver.) If the supply of gold increases the existing stock of gold by around 2% a year...maybe a little less... and if that 2% is reduced by 25% to where you're only seeing 1.5% added, so what? That's a really marginal change.

What matters is who has the existing stock of gold. How much is there to back each clown currency? Clearly, the Fed doesn't have what it says it does and the Chicoms have a lot more than they're publicly saying they do. When the wave of institutional and public gold demand hits the beach, it won't matter if they're chasing X amount of gold or X+1.5% or X plus 2%. X+ whatever won't be enough.

Love you guys. keep up the good work.

February 13, 2013 | Unregistered Commenterfallingman

Thanks for the comments -please keep them coming - without them we don't get any balance in this debate

Calling all readers we really do need your comments and although they wont appear instantly we do check twice a day and publish comments whether they agree with us or not. The reason for the delay is to keep the spam off the site as some of it is not nice at all. So please make an effort and fire in your two cents worth.


Bob K

February 13, 2013 | Registered CommenterGold Prices

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