Below we highlight the Gold/Dollar ratio since 1975. This divides the US Dollar index (DXY) into the price of an ounce of Gold. As shown, recently we took out the prior highs of the ratio made in January 1980, and things have now gone completely parabolic. Things don't stay like this forever, and those who have recently joined the party and entered the long Gold/short Dollar trade should tread very carefully.
Taking a longer term view the Gold/Dow ratio tends to trend back towards 1 during bear markets, and since it is still over 10 the gold bull market still isn't close to being over yet. Plus the most spectacular gains in a bull market occur towards the end of the bull market, when the public finally gets involved. The public is far from being heavily involved in the gold market right now, they are just waking up to it.
http://www.kwaves.com/dowgold.htm
Posted by: Justin | March 13, 2008 at 12:35 PM
Interesting chart and argument.
The counter argument is that gold run up is not just driven by dollar index, but also inflation outlook in individual markets. Right now only US Fed is forced to cut rate, while most central banks are either holding steady or raising rate to combat inflation. Gold probably won't go up as much when measured in other currencies, but will probably go up in nominal USD.
Posted by: goldbug | March 13, 2008 at 02:00 PM
You are correct gold won't go up as much against stronger currencies but the fact that it's going up against all currencies right now shows how strong the bull market is and how high money supply growth and inflation rates are affecting the entire world. During the 70's gold had a spectacular run even while interest rates in the U.S. were rising due to high inflation. This bull market has far to go, the public isn't involved yet even though if the Dow would have gone up as much as gold has since the year 2000 it would be over 30,000. Could you imagine how excited people would be about the market if the Dow was over 30,000? Yet gold still barely gets any press time, but that is changing.
http://investmentscore.com/editorials/open_your_eyes
Posted by: Justin | March 13, 2008 at 02:42 PM
Just accounting for inflation would see doubling this, but whether we see that is dependent on memories.
Posted by: Lord | March 13, 2008 at 04:07 PM
Hedge funds and retail buyers have been piling into gold for the last 2-3 years and many of these postions are highly leveraged. Gold like mortgage securities is simply the next bubble to burst. I predict sometime this summer the exits will become very crowded. Look for a 50%-65% drop when the sector hits bottom.
Posted by: kip | March 13, 2008 at 07:40 PM
Hedge funds and retail buyers have been piling into gold for the last 2-3 years and many of these postions are highly leveraged. Gold like mortgage securities is simply the next bubble to burst. I predict sometime this summer the exits will become very crowded. Look for a 50%-65% drop when the sector hits bottom.
Posted by: kip | March 13, 2008 at 07:40 PM
Good advice to be careful, but for a meaningful correction in gold to take place, the Fed would have to actually act as if they cared about the dollar and raise interest rates, and we would have to get out of a war that's bankrupting us. That won't happen for at least another year, so gold is probably safe for now.
Posted by: joe | March 14, 2008 at 12:45 AM
Gold will go through corrections like any other market, but it is in a bull market and will remain so far the next 10 years. By the time the public gets involved gold will be trading for multiple thousands of dollars an ounce and that is when the real fireworks will begin. Bull markets don't end until the public gets involved, and they aren't involved yet. It's funny how CNBC ignored the tech and housing bubbles but they can call a commodity bubble? Commodities are not in bubble territory yet, they are short term overbought but they still have a decade or so to go higher. Commodity bull markets last a long time because it takes years for suppliers to bring new supplies online.
Posted by: Justin | March 14, 2008 at 10:30 AM
what is gold good for anyways? it doesn't do anything for me. to me, it's worthless. i just want to own land. i can do something with that.
Posted by: sinkingship | March 14, 2008 at 04:15 PM
According to THIS, the DXY tracks by means of a "geometric average", whatever that is, the value of the US Dollar against a basket of 6 currencies of which the EURO makes up 53% of the basket.
I note the graph goes back to 1975 but remember that the EURO did not exist prior to 2001. Granted the FFR, the DEM, the HFL etc would have indivicually been placeholders for what is now the EURO.
Nevertheless, unlike the EURO none of these erstwhile European currencies ever were a credible challenge to the USD as the world's reserve currency.
I am sure all these factors also need to be considered when explaining the current place of the USD on this graph.
Posted by: Celal | March 22, 2008 at 05:06 PM
Follows the link that didn't make it in my original post :
http://www.alaron.com/uploadedFiles/alaron/client_services/exchange_resources/NYBOT/What_is_the_USDX_trader_%208.301.pdf
Posted by: Celal | March 22, 2008 at 05:07 PM