There is a generally accepted (and usually) correct belief in the inverse relationship between the US$ and gold. This belief is ingrained and with good reason. The basic $ reserve currency status with the Bretton Woods “agreement” has lasted over 70 years. This agreement was based on having “faith” in both the $ and gold. But that whole time they were at odds, and while Bretton Woods basically ended in 1971 with Richard (Tricky Dick) Nixon, the $ reserve status has continued. So the battle between the $ and gold has been going on a long time, but only one of those will win. And it isn’t the crappy US$ which will prevail.
The correlation between gold and the $ is generally in force, but there can be some serious deviations from this relationship. And it’s usually at the best buying/selling opportunities when the relationship breaks down. The previous post shown below lays out the serious breakdown in the relationship between gold and the $ in the big bottoming process in gold/big topping process in the US$ in the 1999-2001 time frame. It’s my belief that is what is generally happening in the current time frame, but with a twist. The huge problems with the Euro will cause capital to move into both the $ and the PMs (and US Treasuries). And the more important twist – the coming end of the US$’s official reserve currency status. So what will replace it, or will we even have one official reserve currency. “Ex-con” Christine Lagarde and the IMF would like their stupid SDR (Special Drawing Rights) to be the fiat replacement. A better acronym would have been STP (Special Toilet Paper). But what’s more likely for a monetary reset will be to have several options/a basket, and gold would be a part of that. In other words, gold is slowly regaining its’ role as a currency. So as the world’s political problems and currency problems continue to increase, both gold and the $ will generally benefit, with ebbs and flows. But King Dollar’s days are numbered. And when combined with the death of the belief in central bankers’ omnipotence, the future for gold is very bright, especially looking out to the second half of 2017 and beyond.
We hear alot of stories about the relationship between the US$ and gold. I have tried to debunk some of them. There is certainly a relationship between the two, but the correlation is far from exact. First let’s take a look at the big picture US$ and gold. Look at where gold and the $ were in 1999. And then compare it to we are now. Not a great correlation. Certainly part of the situation was the huge 19 1/2 year bear market/trading range into the 1999 low which is a reason for the inexact correlation. That bottoming process set off a huge bull run into September 2011 of almost 8x. Gold was incredibly cheap around year 2000, as many miners were one year ago, and still are. There’s alot of work, planning, and analyzing that goes into this than just the ridiculous notion of gold is the reverse side of the US$.
Here’s a detailed view of the bottoming process in gold from the initial 1999 low (#1), and then comparing it to the topping process in the $ in the same time frame. We can then use this for the current time frame – not as an exact blueprint, but as a general road map of what has actually occurred in the past in major bottoming and topping processes. We will hear many different viewpoints of what gold (supposedly) does vs. the $, but here is what has actually happened. There are several things to notice. The initial 1999 low in gold was at around $250, and yet the Dollar Index (#1) then was almost exactly where it is today. Gold hit it’s intraday low in 1999, well before the $ preliminary topping process (#4) began. The big upthrust and major signs of strength (SOS) (#2 and #3) occurred well before the topping process in the $. The topping process in the $ really took hold around #5, while gold continued to drift lower – rallies and reactions/retesting. And gold’s final retests (#7 and #8), with volatility picking up, and yet the US$ still went to another new high within its’ topping process. And that is important, because gold can bottom before the actual intraday high in the $ bull market being set – as long as the topping process has begun, So then after #8, there are three more powerful SOSes which showed up over the next year. It’s important to note, a big sign of strength is warning of a change of character in a market, almost like a “confirmation” of where a market is eventually headed later. But at the same time, they perversely are also a warning of an impending shorter term top to appear soon. And these reactions usually retest back down to, or below, where the SOS started. At #10, when the US$ did its’ final retest high in the topping process, look at where gold was. It was already ‘sniffing out” the new $ bear market. That $ topping process took arond 24 months to unfold.
The situation in the $ now compared to 2000 is quite similar. Both of them had large accumulation areas, preceding the bull, of about 8 years. They both then rallied and began trading in this range between 103-90, including a large reaction down to set a spring low. But there are some big differences. The US/global debt situation, and the bank derivatives situation was much smaller in 2000. And in 2000, bonds were still in a massive bull market. These will all have big effects on all markets, not just currencies. But specifically for the US$, the effects will likely be bullish initially, but eventually quite bearish. There is tremendous bullishness right now in the $ right as it’s sitting in a pretty big resistance zone. There is also alot of hope in the new Administration. There was alot of hope 16 years ago for the previous Republican Administration of George (Hanging Chad) Bush, but that didn’t stop the $ from putting in a major top. I would expect a similar situation early on with this President-elect. Gold will begin to “sniff out” a topping process in the $, and it will begin take pressure off of it. And there are situations coming up this year in Europe, where gold and the $ can rally together.
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