Strong Dollar and Mediocre Gold

There was a recent article by Egon von Greyerz stating that gold is nearing its 2011 highs.  The article was linked to by

Near the beginning of the article, the author states, “So to talk about a strong dollar is totally ridiculous.”

But towards the end of the article, the author states, “It is possible that we will see dollar strength for a while still but thereafter the world’s reserve currency will join the race to the bottom in earnest.”

So which is it?  Is calling the dollar strong totally ridiculous, or do we have a strong dollar?

The author contradicts his own words within the same article, unless he thinks of himself as totally ridiculous.  Still, I understand the point that he is trying to get at.

The U.S. dollar is strong right now against the other major currencies of the world, particularly the euro and the pound.  It is strong in relative terms as compared to many of the other fiat currencies.

To the author’s point, gold’s been stronger than any currencies if you take the last 15 or so years.  Of course, if you count most of the 1980s and 1990s, this wouldn’t be true.

Gold is very volatile, but it is important to recognize that its volatility is largely due to our monetary system.  There are certainly changes in supply and demand of the metal, but the supply and demand for money is the bigger driver of volatility in the gold price.

Gold has not been a good investment over the last 5 years if you are an American.  It is down over 30% from its highs in 2011.

The article itself is titled “Gold is Near the 2011 Highs”.  This is in reference to other currencies aside from the U.S. dollar.  For example, in the United Kingdom where the pound has lost significant value compared to the dollar, the gold price is only off 8% from its 2011 high.

This is an important point, as gold has not been as weak as what many perceive.  It has been weak in terms of U.S. dollars.  Since the dollar has been so strong over the last several years, it has hurt the gold price in dollar terms.

It might be more accurate to say that the other major currencies – especially the euro – have been really weak.  The dollar just looks strong in comparison.

But it is true that investors will seek out a relatively strong currency and make it stronger.  If you have your wealth in euros and you want to protect it, the U.S. dollar provides a good option for a liquid investment that can easily be converted back to euros.

The Federal Reserve has had a tight monetary policy for two years now.  QE3 ended in October 2014.  This has helped push up the dollar in relation to some of the other currencies.

The dollar strength (relatively speaking) may continue for a while, especially with the other major central banks engaging in massive monetary inflation.  The dollar ends up being one of the least bad and most liquid forms of money in our world dominated by central banking and fiat money.

However, this doesn’t stop Europeans, Japanese, Chinese, and others from buying into gold.  If things get bad enough in these places, some people may start turning to gold instead of other currencies.  I’m not saying it will happen, but just that it is certainly possible.

In that case, it doesn’t matter if the U.S. dollar remains strong.  If the demand for gold surges, the price will go up, even in dollar terms.

Gold is actually fairly stagnant these days.  It is not really in a bear market.  If anything, it is probably a lull in a greater bull market.

If the U.S. dollar does significantly weaken against other major currencies in the future, then gold could really skyrocket.  But it can still go up even with a relatively strong dollar.

Going forward, the economy and Federal Reserve policy will drive gold prices more than the U.S. dollar’s relative strength against other currencies.

One thought on “Strong Dollar and Mediocre Gold”

  1. “Gold is very volatile, but it is important to recognize that its volatility is largely due to our monetary system.” You definitely hit that right on. I think that if our monetary system does a dive, that gold is going to skyrocket.

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