Gold's Divergence
Tony Bortolin
SUMMARY: Did you notice? The last time the US Dollar was this low (meaning on January 9, 2004 when it closed at 85.16), the price of Gold was significantly higher; it had closed as high as $426.56 rather than the current $412. This suggests that Gold could easily rise without much of a drop in the Dollar.
DISCUSSION: As discussed in earlier articles, including ones by this writer, Joe Investor, the price of Gold can be anticipated as moving in an inverse relationship to the U.S. dollar. Since Gold is priced in U.S. dollars, if the value of the U.S. dollar goes down, more of those dollars are needed to buy the same amount of Gold, so the price of Gold instantly goes up, subject to anything else affecting Gold. Conversely, if the U.S. dollar goes up, the price of Gold goes down. It's a direct, mathematical relationship.
(If you need to get specific, a 1% drop in the Dollar would basically mean a 1% rise in Gold. But a 50% drop in the Dollar would equate to a 100% rise in Gold because it would cost twice as many Dollars for the same amount of gold (twice as many being the inverse of 50%). If the Dollar is down 20%, then Gold should be up by the inverse of 80%, or an increase of 25%. If the Dollar is down 10%, then gold should be up by about 11%. And so on.)
Gold doesn't always react so precisely to the Dollar because it is also affected by its own supply and demand factors; in swinging away from that relationship to the Dollar, it can be said to "divert" from the Dollar. Otherwise, when those factors are constant or balance each other, any change in the Dollar does cause an instant inverse reaction in the price of Gold.
As previously discussed, since about 2001, Gold has been "diverting" or gaining in value beyond the corresponding drop in the Dollar. However, there have been some corrections or threatened reversals along the way. Looks like we just went through another one.
I have taken the time to prepare an updated chart of the recent actual price of Gold (shown in dark blue) as compared to what its price would have been if it had reacted solely to changes in the Dollar using September 4, 2003 as a reference point, (the latter price being a mathematically simulated, and shown in light blue); all daily closing prices being supplied by ino.com.
With this chart, we see that Gold tracked the movement of the Dollar during the first and third weeks of September fairly well. In other words, Gold (shown in dark blue) rose in lockstep with the falling Dollar (effectively represented in light blue). There was a state of equilibrium during that period so it provides a reference.
As shown at point "A" on the Chart, Gold then fell well below that reference line, meaning it fell even though it should have been rising, if it had been solely affected by the dropping Dollar.
As may have been expected because of this divergence, Gold eventually recovered to that reference line, namely on about November 13. It then moved in lockstep for the rest of the month; see point "B".
As shown at point "C", Gold then diverted upward rather than downward from that reference line, increasing in value beyond the corresponding drop in the Dollar. Could this have been predicted as a time to sell? Not necessarily as this could have simply been another step in Gold's recent multi-year upward divergence from the Dollar. In other words, Gold was once again increasing in value on an international scale rather than just in US Dollar terms.
However, as shown at point "D", Gold did swing back down as compared to the Dollar, starting around January 12, 2004 through to about February 3, 2004. As you can see, since February 3, Gold has been rising, but it still has yet to regain its international strength as compared to certain previous dates.
For example, as mentioned above, on January 9, 2004, Gold had closed as high as $426.56 when the US Dollar had closed at 85.16; the US Dollar has basically returned to that level as of the close on February 11, but the price of Gold has merely returned to about $412. This suggests that Gold could easily rise 2-3% without much of a drop in the Dollar. Alternatively, Gold could hold quite steady despite a small rise in the Dollar. Of course, yet another alternative is that Gold resumes the increase in its downward divergence from the Dollar, but I'd be concerned about shorting Gold just yet.
Being Joe Investor, I'm not making any predictions myself, only observations as to how Gold is lower than it has been, as compared to the Dollar. I'm just a private investor, not a qualified advisor. I am invested in gold shares. I did not receive any compensation for this report.
Copyright © T. Bortolin, February 12, 2004
Tony Bortolin
eMail bortolin@pathcom.com
Toronto, Canada
Nothing in this article is intended as investment or professional advice or as a recommendation to buy or sell anything. Each reader is solely responsible for doing their own due diligence or obtaining their own professional advice before making any investment. Any stocks mentioned in this article are for illustration purposes only. All information is taken from sources believed to be correct and complete.
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