Gold is Not a Function of the US Dollar 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

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

Gold vs the CPI

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?

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.