Gold Surprises as Dollar Gets Monkey-Hammered Lower
In "Gold Leaps Higher as Worries Mount," I briefly pointed out how those very same institutions that championed quantitative easing policies implemented by the Federal Reserve are now coming out to proclaim quantitative easing added no substantial benefit to the real economy.
Gold was pushed lower on the assumption that central banking policy would all pan out and that the U.S. would finally achieve escape velocity; but the exact opposite is occurring. Despite the near 12 to 16 months of absolutely horrendous, even recessionary data, market participants believed that if the Fed began to tighten monetary policy then the economy must be alright.
Central bankers,misguided by classroom academics and abhorrent to real world economic dynamics, believe that if you tinker with interest rates that somehow inflation will magically begin to rise. Not so because it is real, meaningful growth that produces inflation; and it is more evident now that the these policies do not produce meaningful growth.
I mapped out the dollar's downward trajectory, which was largely based on the floundering economy and the inability for the Fed to take action that will pop asset inflation. I still believe this is based on the above factors and that the dollar will likely gather strength as the US slips into deflation.
Traders and CNBC pundits think that if deflation takes hold then gold will surely decline into the abyss. And just like their "lower gas prices equal booming consumer spending" myth, gold falling off a cliff during deflation is just as preposterous.
Gold is unique in that if can act like an insurance policy against both sides of tail risk (inflation and deflation). It is well-known that gold had a massive bull run when stagflation took hold of the US during the 1970s. Inflation ran amok.
However, nobody mentions that gold tripled, in inflation-adjusted dollar terms, during the early 1930s (the Great Depression) prior to President Roosevelt outlawing the private ownership of gold.
As I wrote last April:
"There is an assumption that the dollar and gold’s performance is strictly inverse of one another, but that is not so. The WGC (World Gold Council) indicates that between early 2014 and March 20, 2015, the dollar has gained over 20 percent while gold only fell 1.2 percent.
Historically, gold prices more than double on a weak dollar than it falls on a stronger dollar. Thus, a stronger dollar is not indicative of massive gold depreciation.
When the dollar declines, gold has appreciated 14.9 percent. Yet, when the dollar strengthens, gold has only fallen by 6.5 percent, according to the WGC. "
If you look at this chart, you will notice one thing: gold sure looks to trend with the SPX. There is an argument that this due to simple asset inflation.
Notice the massive divergence began when gold began to top in 2011. The divergence is what I call the "perception" gap.
I expect that divergence to close. It's no secret that I was right about the volatility of 2015, along with other key macro trends. I believe by the end of 2016 and 2017 is when the real fireworks begin.
Gold's recent move has been huge, and, of course, there will be profit taking. But those who follow me know that the underlying fundamentals for gold has been strengthening for some time.
(Note: the gold chart is the same I used in the above mentioned gold idea, but the minor uptrend (along with new resistance) were added).
Please follow me @lemieux_26 and check out my other ideas, which have links to previous writings.
Gold was pushed lower on the assumption that central banking policy would all pan out and that the U.S. would finally achieve escape velocity; but the exact opposite is occurring. Despite the near 12 to 16 months of absolutely horrendous, even recessionary data, market participants believed that if the Fed began to tighten monetary policy then the economy must be alright.
Central bankers,misguided by classroom academics and abhorrent to real world economic dynamics, believe that if you tinker with interest rates that somehow inflation will magically begin to rise. Not so because it is real, meaningful growth that produces inflation; and it is more evident now that the these policies do not produce meaningful growth.
I mapped out the dollar's downward trajectory, which was largely based on the floundering economy and the inability for the Fed to take action that will pop asset inflation. I still believe this is based on the above factors and that the dollar will likely gather strength as the US slips into deflation.
Traders and CNBC pundits think that if deflation takes hold then gold will surely decline into the abyss. And just like their "lower gas prices equal booming consumer spending" myth, gold falling off a cliff during deflation is just as preposterous.
Gold is unique in that if can act like an insurance policy against both sides of tail risk (inflation and deflation). It is well-known that gold had a massive bull run when stagflation took hold of the US during the 1970s. Inflation ran amok.
However, nobody mentions that gold tripled, in inflation-adjusted dollar terms, during the early 1930s (the Great Depression) prior to President Roosevelt outlawing the private ownership of gold.
As I wrote last April:
"There is an assumption that the dollar and gold’s performance is strictly inverse of one another, but that is not so. The WGC (World Gold Council) indicates that between early 2014 and March 20, 2015, the dollar has gained over 20 percent while gold only fell 1.2 percent.
Historically, gold prices more than double on a weak dollar than it falls on a stronger dollar. Thus, a stronger dollar is not indicative of massive gold depreciation.
When the dollar declines, gold has appreciated 14.9 percent. Yet, when the dollar strengthens, gold has only fallen by 6.5 percent, according to the WGC. "
If you look at this chart, you will notice one thing: gold sure looks to trend with the SPX. There is an argument that this due to simple asset inflation.
Notice the massive divergence began when gold began to top in 2011. The divergence is what I call the "perception" gap.
I expect that divergence to close. It's no secret that I was right about the volatility of 2015, along with other key macro trends. I believe by the end of 2016 and 2017 is when the real fireworks begin.
Gold's recent move has been huge, and, of course, there will be profit taking. But those who follow me know that the underlying fundamentals for gold has been strengthening for some time.
(Note: the gold chart is the same I used in the above mentioned gold idea, but the minor uptrend (along with new resistance) were added).
Please follow me @lemieux_26 and check out my other ideas, which have links to previous writings.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.