xauusd

Swings in the US dollar have no long-term impact in the price of gold. Nor is gold an inflation hedge.

Three Points

  • December 2004: US Dollar Index 108, Gold $435
  • April 2009: US Dollar Index 108, Gold $883
  • November 2014: US Dollar Index 108, Gold $1182

Gold vs Trade-Weighted Dollar Index 1973-Present

xauusd

While gold generally moves opposite the dollar in day-to-day fluctuations, long term impacts are nonexistent.

Here is the chart with the index of gold and the dollar set to the same base year, 1997.

Gold vs Trade-Weighted Dollar Index

xauusd

Gold vs the CPI

xauusd

Gold fell from $850 to $250 from 1980 to 2000 with inflation every step of the way.

What happened?

People had faith in the great "Maestro", Alan Greenspan.

But, But, But

But Mish, inflation is understated.

Indeed it is. Central banks are clueless regarding how to measure inflation. Bubbles are a direct consequence of inflation.

Note the implication: Because inflation is higher than reported, gold is even less of an inflation hedge!

One Exception

There is one exception to the rule gold is not an inflation hedge.

The exception is extremely high rates of inflation, especially hyperinflation.

In case of hyperinflation, nearly any storable physical asset is a hedge: cheese, cigarettes, gasoline, etc.

Three Things Gold Isn't

  1. A function of the US dollar in any meaningful way
  2. A measure of inflation
  3. A good hedge against inflation

So What Is It?

gold

Measure of Faith in Central Banks

On a price per ounce basis, gold is primarily a measure of faith in central banks.

If you believe central banks have everything under control, don't buy gold.

But Why Have Faith?

  1. "Zero Has No Meaning" Says Greenspan: I Disagree, So Does Gold
  2. 30-Year Long Bond Yield Crashes Through 2% Mark to Record Low 1.98%
  3. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  4. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  5. Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid

If you believe monetary madness, negative interest rates, and negative rate mortgages prove central banks do not have things under control, then you know what to do.

This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD hovers around the 34-months lows amid growth concerns

EUR/USD is trading below 1.0850, just above the lowest since April 2017. Concerns about eurozone growth are weighing on the common currency. Markets are watching coronavirus developments. 

EUR/USD News

GBP/USD shrugs off Brexit concerns and holds its ground

GBP/USD is trading around 1.3050, little-changed. The French foreign minister warned of acrimonious Brexit talks as the UK's chief negotiator is laying down a tough stance. 

GBP/USD News

Forex Today: Coronavirus fears persist, Japanese economy squeezes, cryptos climb down

China has announced it will stimulate the economy in the face of the coronavirus outbreak, including lower corporate taxes and increased spending. While most factories have returned to work, Beijing has tightened restrictions on movements in the Hubei province.

Read more

Gold slips below $1580 level amid improving risk sentiment

Gold retreats from two-week tops amid receding demand for traditional safe-haven assets. The precious metal failed to capitalize on its recent positive move to near two-week tops and edged lower during the early European session on Monday amid fading safe-haven demand.

Gold News

FXStreet launches Real-Time Trading Signals

FXStreet Signals offers access to explanatory live webinars, real-time notifications when signals are triggered and exclusive membership to the company’s Telegram group, where users get direct guidance by our analysts and get room to discuss and interact.

More info

Forex Majors

Cryptocurrencies

Signatures