Short Answer As To Why the U.S. Dollar Price of Gold Is Falling:
Because the U.S. Dollar Index is rising. Gold and the U.S. Dollar Index have been in almost perfect inverse of each other the last decade. This isn’t rocket science folks.
Despite some minor moves higher in the price of gold recently, along with the U.S. Dollar getting stronger, the cyclical movement in gold is presently down. The secular movement of a higher U.S. Dollar price of gold is still intact.
We’re still in the 2nd and longest stage of the gold bull market and this cyclical movement down is presenting an opportunity for you to add more gold (or start buying gold if you haven’t already). A Dollar Cost Averaging approach to investing in gold makes sense.
How far will gold fall? See the long answer below for the answer.
Long Answer As To Why the U.S. Dollar Price of Gold Is Falling:
November 18th, 2009 I wrote the following;
There is a reason why Obama chose this time to take his trip to China. The U.S. needs to maintain the U.S. Dollar’s world reserve currency status. It cannot afford to become a second rate nation. Something has to be done.
In late September, the G20 meeting result was getting China on board with his strong dollar initiative mantra.
Japan has been experiencing the unwinding of the Yen carry trade and has appreciated against the Dollar like many other currencies. So Geithner went to Japan and the result of that meeting was getting them to say they support a strong dollar.
China and Japan hold most of the U.S. Debt and with them on board, coupled with Obama’s trip to both countries in the last couple of weeks, something might be up for the Dollar. That something might be more U.S. Dollar support.
The important lesson here is follow what our leaders are doing. One has to be able to put the pieces of the puzzle together to see the big picture. What I saw was the attempt by the Obama administration to implement a strong dollar policy through his speaking with the two largest holders of U.S. Debt, Japan and China while at the same time, his side kick Timmy Geithner talking the talk of a strong dollar.
What’s occurred since the Obama/Geithner whirlwind tour was the U.S. Dollar Index rising about 11% and gold falling about 10% in U.S. Dollar terms. But looking at the big picture, I did recommend investors at that time look at trading gold in EUROs which is up 7.92% in the last 60 days. At the same time I tried to explain to investors that gold is not falling. It’s only the currency gold is priced in that falls.
What I saw was a non-confirmation of the Dollar Index reaching new lows thus not confirming the gold break out to new highs. You can’t have one without the other. Just like what we’ve seen lately whereby the price of gold has been moving higher along with the Dollar Index breaking out higher. Today’s price action with gold down $16 showed us that this couldn’t last. Something had to give.
January 20th I wrote:
Cash Has Been King for Two Months
Just having money in cash has earned an investor 5% appreciation (plus interest) since the dollar index low of 74 just a couple months ago. The Dollar index as of this writing is sitting at 78.41.
Cash is still king with the Dollar Index closing today around 81.80.
January 26th I wrote:
I’ve been calling a pull-back in gold and we’re seeing this occur, barring any “external influences.” But it is the rise of the dollar that is causing this pullback, not the production of more gold.
The media will continually try and spin the negativity concerning gold. Corporations don’t want competition to their stocks (via mutual funds) and the Federal Reserve doesn’t want competition to the U.S. Dollar. The Elliott Wave folks have been right so far as there haven’t been any external influences affecting the cyclical trend in the dollar and gold.
If the Dollar Is Stronger, Wouldn’t There Be a Higher Demand for Treasuries?
With the Dollar Index stronger, pushing close to the 82 mark, one has to wonder why TBT is up over 3.5% today. TBT is the Exchange Traded Fund (ETF) that represents the UltraShort 20+ Year Treasury. This means investors are betting that treasuries will fall in price, in this case, the 20+ year treasuries. When TBT moves higher in price, it’s because investors are losing faith in longer term treasuries.
The reason TBT is higher today can be found in the disappointing 5 year Treasury auction that produced “slim demand” today. This means at present, investors don’t even like the 5 year treasuries. In fact, International buying of the 5 year treasuries is at its lowest level since July of 2009, a full 10% below its average. This is something to keep an eye on.
From a long term perspective, I like TBT. I’d like to buy it lower though and might have that opportunity as long as the Dollar Index keeps rising. The Dollar Index in the 90-95 range would offer a good opportunity to Dollar Cost Average into TBT.
Buried in that CBS MarketWatch article though was a comment worth exploring as it represents what’s going on with investors today.
After the auction, yields remained sharply higher in the broader government-bond market as corporate and other higher-risk debt drew investors away from Treasury’s.
Investors Chasing Yield – How Long Before They Get Burned?
What we see from that statement above is the fact that investors are now tired of getting such a low return on their so called “safe” investments that they have now bought into the lure of a higher yield through riskier bonds.
Let’s face it. With yield on treasuries and CD’s so low, those who have lived off of the interest from their various investments have seen their income fall considerably. To prevent having to dip into principal and deplete one’s savings, investors are now choosing to put their money in financial instruments that offer a better return.
Many of these investors are even jumping into the high risk, high yield bonds, aka junk bonds offered by corporations paying them 3 to 6 times the income of treasuries and CD’s. Maybe investors forgot about 2001 already?
If you’re one of these people looking for higher yield, be patient. It will come. But it will come at the expense of your junk bond fund principal once interest rates start to climb again. If your return on these instruments seems too good to be true, it probably is. It’s better to cut expenses than chase yield. There’s still a lesson to be learned from the hare versus the tortoise fable. Slow and steady wins the race…
But Gold Doesn’t Pay Interest
While it is true that gold doesn’t pay interest, historically it was meant to be a medium of exchange (money), not a savings vehicle. It was only when Federal Reserve Notes came into existence that interest bearing accounts were created to counter the fall in value of the paper currency. This relationship of interest paid on paper currency accounts and gold decoupled in 1971.
Since that time, gold is winning the game. But more importantly, one holds gold as insurance against any U.S. Dollar problem that might occur. Gold needs to be part of everyone’s portfolio as it is the only real asset that can counteract the fall of the U.S. Dollar that most of your other assets are priced in.
How Far Will Gold Fall?
I don’t know of anyone who can answer this question. But what I can do is tell you it’s the wrong question to ask. The philosophy of why you need to be invested in gold is a better way to address this question.
This philosophy is never explained to you by your financial advisor’s. It was never included in the Certified Financial Planner (CFP) books I bought when I was planning on getting my “CFP” designation as a financial advisor. In fact, I disagreed with what I was reading and decided the designation wasn’t important to me any longer. Even further, I left the industry completely to pursue giving the truth to investors through my writing.
This philosophy is explained here in an article I wrote July 8, 2009 Challenging Financial Advisors on the Need to Diversify Into Gold. My goal is to simply educate investors on the need to diversify into gold. Gold stabilizes one’s portfolio while counteracting the fall in the U.S. Dollar.
This doesn’t mean one rushes out and puts all their money into gold. At this point, Dollar Cost Averaging into a 10% – 20% position makes financial sense. Those who actually understand the need to be in gold don’t mind it falling to $700 an ounce (so they can buy more at a lower price) on it’s way to $2,000 and higher. If you aren’t able to grasp this philosophy from reading this synopsis, please click on the “gold” tab above and read the articles I’ve written from the beginning date (click “older entries” at the bottom of the page until you get to the September 2008).
Or you can just read my book, “Buy Gold And Silver Safely” in which Chapter 4 details what is to come for the economy and why you should be looking to diversify into gold and silver.
Why is the U.S. Dollar price of gold rising the last couple days? Because the Dollar Index has been falling. Today also, the euro zone leaders won approval for an aid deal for Greece. The IMF was involved in the deal.
Think about this for a moment.
Greece is bailed out for their past mismanagement and bad investment decisions. The EURO gets stronger today because of it. The IMF has been selling its gold. The IMF helped bailout Iceland. Will the IMF bail out the other members of the PIIGS too (Portugal, Ireland, Italy, Spain)? Where does the IMF get their funds to conduct bailouts? Who audits the IMF? If the IMF has less gold, what do they use as collateral?
How can the other PIIGS as well as other countries not expect to be bailed out if they bail out one? What incentive do they have to play by the rules? Anyone see this is exactly what the U.S. Government did with the help of the Treasury and the Federal Reserve in bailing out Goldman, ING, J.P. Morgan, Citibank, Fannie, Freddie and GM? Why didn’t the IMF step in to help in this process if they are so giving? Answer: The U.S. IS the IMF. Where do you think they get most of their funding from? And who do you think sets up shop in other countries that do the borrowing to pay back the loans? Just look at Jamaica as an example.
Greece didn’t have the privilege that we here in the U.S. had with the Federal Reserve and their magical printing machine available to add $2 trillion to their balance sheet in “saving” the U.S. (or more to the point, certain companies in the U.S.) from failing. All the Fed has done is delay the inevitable bust. All the IMF is doing by bailing out Greece is delaying the inevitable bust.
Don’t be fooled by such shenanigans.
What a wicked game we play…
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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