Gold is NOT At An All-Time High, and the Gold Rally Could Suddenly Reverse if Dollar Strengthens → Washingtons Blog
Gold is NOT At An All-Time High, and the Gold Rally Could Suddenly Reverse if Dollar Strengthens - Washingtons Blog

Thursday, October 8, 2009

Gold is NOT At An All-Time High, and the Gold Rally Could Suddenly Reverse if Dollar Strengthens

Everyone knows that gold is now at an all-time high, right?


As Barry Ritholtz points out:

While everyone seems to be all abuzz over Gold’s new highs, you should be aware that these are nominal, not real highs.

Adjusted for Inflation, Gold is nowhere near its all time peak — in real terms, its only about half its prior highs:


gold REAL dollars
courtesy of Bianco Research

[click for full chart]

And MarketWatch notes:

Gold's performance in the euro, British pound and other currencies has been lackluster compared to its rise in U.S. dollars, a trend suggesting investors are more interested in bullion as a hedge against the greenback than global inflation.

That sensitivity also means the gold rally could quickly reverse if the U.S. dollar gains ground, one analyst warned.

"The lion's share of the gold-price increase is due to the weak dollar," said Carsten Fritsch, a commodities analyst for Commerzbank in Frankfurt. "Once things make a turn there, you could see a quite rapid correction in gold prices"...

In British pounds, gold has sunk about 6% from February highs and is up just 6% for the year, based on pricing of the most active contracts at the time.

In Australian dollars, the metal has tumbled about 25% from its February highs and has actually lost ground for the year.

The disparity reveals just how crucial a role the falling U.S. dollar has played in driving up gold and other commodities prices.

Gold is usually seen as the ultimate currency - a liquid investment that holds fast when paper currencies depreciate, potentially because inflation is rising. But in recent months, investors seem to be treating the metal specifically as a hedge against the dollar's drop than a deterioration in currencies in general.

For arguments for a strengthening dollar, see this. For my view of gold in the long-term, see this and this.


  1. We should all heave a great sigh of commendation upon the author of this dreary article for opening up this conceptual can of worms.

    Now we can finally see whom it is that is making sense, and whom it is that is simply glossing-over the stark reality of a rather crude intellectual malaise, passing it all off as knowledge from on high, -from the gold bugs as it whirs about in their clock-like brains.

    In classical economics -the strength of an economy -and more importantly- the strength of any specific currency -can be fathomed and gauged by the volume of its physical-units being shuffled, carted and stacked about the planet, while maintaining enough value so that -as the total volume of that currency in circulation increases (as all currency volumes seem to increase like this) -the sum-total-value-of-all-this-currency also continues to increase. Note: -the SUM total increases in value-.

    In the world economy today -this is true about some currencies, but NOT all.

    The dollar as the world's reserve currency, continues to SOAR in total value. The value of the dollars in circulation continues to dominate the landscape of economics worldwide, -and this dominance is increasing exponentially.

    The YUAN also rises. Even gold rises, (if we want to call gold a "currency" -as it is but a legacy currency).

    But NOT all currencies individually are rising.

    IN FACT -most currencies are falling.

    It's called a depression, folks. And we shouldn't be shy about saying the word.

    Some, like the Mexican PESO, are falling off a cliff.


    While gold -viewed as a "currency"- is currently rising, -of those "currencies" whose total coinage might have the potential to fall in value- GOLD IS CLEARLY DOOMED.

    This is true even though relative to all other currencies -less gold is being put into circulation than any other currency.

    This is why gold is not really considered a currency by either serious economists or by creditable investors.

    A common commodity-like correction in the price of gold has happened before.


    It will happen when there is a tightening of fed policy and the diminishing supply of the world's reserve currency, the currency of last resort, forces the liquidation of all other world currencies to accommodate the rising demand for dollars.

    That is the trap awaiting these rascals and ragamuffins, these young upstarts who call themselves economists -worldwide.

    When the driver of this sleigh pulls on the money-supply reins and veers toward a tightening monetary policy to avoid the inflationary precipice, gold will be thrown from the sled and right off the cliff.

  2. yeah? well there is no sign that the driver of this sleigh will pull on the reins for quite a while. I will take your advice and own gold for the foreseable future. There is no responsible "monetary policy" in the near future...wouldn't you agree?


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