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« A Piece of the Gold Puzzle Falls into Place | Main | Open Letter to the World Gold Council »

Gold Prices Still Dependent On The US Dollar


We will begin by taking a look at some of the factors that usually drive investors into the arms of ‘safe haven’ gold and other precious metals.

We are all aware that the world is in a chaotic state at the moment with a number of friction points that could spark and get of hand at any time. The debt ceiling has been raised in the United States paving the way for more government spending. Bond buying programs remain in place and currency creation by a number of governments continues unabated as each nation attempts to boost exports by debasing their own currency. The production of gold from mining activities is slowing. The demand, especially from China appears to be in overdrive. On a seasonality basis the fall is usually a time when gold does very well, but that is not happening this year, at least not just yet.

The list of positive factors that support higher gold prices goes on and on, however, as the chart below shows, gold is now trading at around $1300/oz which is long way down from the heady days of $1900/oz, achieved in 2011.

The Gold Chart


The gold chart shows that over the last 6 months gold has tried to rally and failed. The best it could do was a large jump on the news that ‘tapering’ had been deferred and that lasted for just two days before all those gains were lost. We would also draw your attention to the formation of a pattern of lower highs and lower lows which suggests weakness and further losses in value.

Gold also has an inverse relationship with the US Dollar so it’s important that we monitor the dollars progress and performance.

The US Dollar Chart


The dollar has been sold off recently as evidenced by the US Dollar Index which depicts the dollar falling from ‘85’ to ‘79’ over the last 4 months. If the dollar can hold at this level then there is a possibility of a rally, which would in turn put a lid on gold’s progress. A lot depends on the Feds assessment of the inflation and the employment figures, the latest of which were released earlier this week. The consensus was for around 180,000 new jobs so the figure of 148,000 is low but sufficient for the Fed to assume that they have in place the correct course of action.

We doubt that we will see tapering this year and we expect the current level of QE to be maintained. This should have a negative impact on the dollar, although this level of stimulus is becoming the ‘norm’ and so the Law of Diminishing returns comes into play. Should QE be increased then the dollar would weaken and gold would be the beneficiary.


The tensions that exist in the world today are a known quantity and are therefore included in the price of gold.

The creation of more and more money has become the rule rather than the exception and so gold largely ignores it.

China is now the second largest economy in the world so it is reasonable to expect that they should be acquiring more hard assets such as gold. To fascilitate China’s purchases of gold someone else must be selling and so the transfer of wealth from the west to east continues. A change in ownership does not necessarily equate to a new bull market in precious metals.

The bear trend within the gold bull market is still in place so why not wait until you are sure that this phase has exhausted itself and a new bull phase has commenced. Sure you will miss the beginning of the move but you will have more certainty of generating a decent profit.

Should gold manage to form a new near term high; say a close above $1400/oz, then we might get a decent rally, but don’t hold your breath, it could be months away.

The cost to produce gold is now closing in on the gold price which means that it is doubly important to select good quality gold producers, as they should survive any downturn in prices and live to fight another day, even pay a decent dividend one day, now there’s a novel idea.

In a nutshell it’s a time for patience, a time to do the due diligence that is necessary before embarking on the acquisition trail.

Take care.  

In September 2011 the Gold Bugs index, the HUI stood at 630 as gold prices peaked, since then both have trended lower with the HUI losing about 65% of its value. The bottom has been called a number of times and after such a dramatic decline its difficult not to think that we are there now. However, as we all know the timing of any investment is crucial to its success and that is exactly what we are trying to do here, trying to pick advantageous entry and exit points. If you would like to know which stocks we are buying and selling please join us atStock Trader our premium investment service.

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Reader Comments (4)

The charts mean nothing. Sorry, I wish they still did.

Here's the truth. You can't talk meaningfully about factors affecting the gold price without addressing the single factor that dwarfs all others.

The Fed and the BIS, acting through JPMorgan and HSBC, are selling Comex futures to drive the price down. End of story. Good night.

It's not really any more complicated than that. They're playing with those who use technical analysis, dumping massive numbers of contracts in the middle of the night at critical junctures on the charts to collapse the bid stack and run the stops.

To talk about the dollar and world events and the price of production as drivers of price is like talking about the effect barometric pressure has on how you feel while a 600 pound guy is sitting on your chest.

By the way, if the dollar is a key to gold's movements, how come gold hasn't rallied strongly on this swoon vs. just wobbling around its lows? And how come gold has effectively doubled since mid 2007, while the USDX is absolutely flat? And how come, they both rose sharply in tandem in the fall of 08 into '09...and have risen together many times in the past?

That dog won't hunt.

October 24, 2013 | Unregistered Commenterfallingman

Since golds peak, say the last 2 years or so gold has under performed the dollar.

I agree that the early part of the gold bull market was fabulous, but since the peak its been heading south.

Many have called the bottom over this period and like a broken clock they will be right sooner or later.

I'm not sure that the bottom is in, if the powers that be want it lower and keep dumping large amounts at opportune times then gold will go lower.

Finally, I've never had a hunting dog....

October 24, 2013 | Registered CommenterGold Prices

It's a Southern expression, even though I was born in NY, I've lived down here for 50 years.

I don't know that a bottom is in either. What you say is true. But if they ARE dumping to suppress the Comex price, which isn't theory ... I can see it with my own eyes ...SOMEBODY is doing it ... then what are the charts telling us about future direction? They don't reflect true supply/demand fundamentals.

What they tell me is what a rolled up newspaper tells a dog. Get ready for another beating ... another raid in the middle of the night where that infamous "not-for-profit" seller comes calling with tons upon tons to sell "at the market, which all of us will agree is nuts ... unless their intention is to drive the price down.

What the charts CAN tell me is when they're in business and when they've backed off.

The fact that we get these raids whenever it would look really bad for gold to be rallying ... fiscal cliff ... QE4ever ... Syria/oil spiking ... budget/debt ceiling debate ... Yellen announced .... etc. etc. etc. tells me this is an official operation. No sane trader would be selling massive amounts into the very news that would make you want less Fed paper and more hard money.

A couple hundred dollar move higher would tell me they're having trouble sustaining their campaign. A $300 move would tell me they're trying to hold back the tide and all they can do is blunt it a little. A move above that tells me they've failed.

October 25, 2013 | Unregistered Commenterfallingman

its time for a King Canute type of character to be called in then...

I suspect that the dollar will get dumped before too long, and that could be the catalyst that sends gold higher despite the efforts of the dumpers, but for now they do appear to have the upper hand and the dollar looks set for a rebound.

October 25, 2013 | Registered CommenterGold Prices

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