Why The Current Value Of Gold Does
Not Reflect The Lower Dollar
Greg Silberman CA(SA), CFA (Retired)
The pound to dollar conversion rate is hitting historic highs of $2 to £1 and euro dollar conversion rates are also at historic highs. So why does the current value of Gold not reflect this?
Chart 1 - US Dollar index with gold prices chart below
The US Dollar has been moving relentlessly lower since the beginning of 2006. The market value of Gold however has not made a new high since May 2006. Does this alone dispel the fact that Gold and the US Dollar are inversely correlated?
Some theories:
- Gold doesn't believe the drop in the Dollar is real but merely temporary (doubtful).
- Gold is being manipulated and prevented from breaking out to new highs by the powers that be (plausible).
- There is a time lag between a falling Dollar impacting on the current value of Gold (most likely).
I don't deny the Gold market is being manipulated but in the long-term, this manipulation, as with all manipulations is doomed to fail. Therefore, from the 3 reasons above I think the last is the most credible and important.
The Dollar has been falling yes, but against what? Against other paper currencies. The pound to dollar conversion rate is at historic highs at over $2 to £1 and euro dollar conversion rates are also at historic highs! This means that confidence in paper currencies has remained strong even whilst the world's reserve currency has faltered. This has been achieved by suppressing inflation expectations, a liquidity deluge which has kept credit spreads low (masking risk) and equity markets floating into the stratosphere. But most importantly, a deluge of liquidity has kept house prices rising and consumer's in-the-money.
Needless to say this may all be coming to an end. The falling Dollar is finally pushing interest rates higher and credit spreads wider which is exposing marginal debt built up over the years. Further Dollar weakness will most likely be of the offensive kind causing a shift in the price of risk as opposed to moving from one fiat currency to another. That's when the current value of Gold will reflect the underlying fundamentals and it may very well be upon us right now!
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Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
July 17, 2007
I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks.
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This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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