Dollar - Gold Relationship

For many years, we have been told that there is a natural relationship between the dollar and gold. How often have you heard on CNBC "This morning, the dollar is up which is bringing down the price of gold". Let's look at the last 18 months of relative performance.

The dollar had ups and downs in the last 18 months - at one point was up 10%. But over the last 18 months, it's pretty stable, being down a little more than 1%. In the meantime, gold is up 44%. Where is the relationship? Actually, at one point earlier this year, gold and the dollar were moving in tandem when they should have been moving in opposite directions. What could be the reasons for this counterintuitive move?

• Increased demand for gold
• Speculation
• Inflation fears

You can read all the stories about increased demand in India and China but at the same time, nowhere can we read that there is a production shortage. Production went down in 2008 due to problems in Indonesia, S. Africa and Australia, but went up close to 10% last year. In addition, organization like the FMI have sold gold on the market. 


Inflation fears arise from the increased money supplies in the USA and Europe. But official numbers (can they be trusted?) still point to moderate inflation in industrialized countries for years to come (inflation in emerging markets have other structural sources). 


That leaves speculation! Looking at the last couple of years, the price of gold has seen a parabolic rise similar to what we have seen in the oil prices in 2008. And there is plenty of evidence that speculation was at the source of that price hike.


I am not saying that this is the only reason, but when you see how many gold ads there are on television and how they push buying gold for "protection" (I myself would rather stock up on food and guns and will not sell it for pieces of gold when the shit hits the fan) you can only imagine that someone is going to get burned!