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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: J.T. who wrote (6406)	1/30/2001 11:43:12 PM
From: J.T.	Respond to of 19219

The non-relationship between the US dollar and gold Old Post: 2001/01/3 By: Tim Wood mips1.net WRITING about gold is not for the thin skinned. Apparently we journalists are all stool pigeons, fools really. At least that is what I'm led to believe by the engulfing correspondence that accompanies any commentary on gold as an investment. So, donning a rhinoceros hide, this article is a deliberate departure from the routines of observation into bold assertion. The relationship between the dollar's value and the gold price is alleged rather than true, a common sense conclusion you'll see. It's an important issue because for at least three years, the most strident gold bugs have been forewarning of a financial cataclysm. Not a mild recession among OECD countries, but a global blackout that evokes the German Inflation, Great Depression, Dante's Inferno and the odd World War. They predict that (fiat) money and the assets bought by it will become worthless leading us to rely again on gold. The basis for all the pessimism is an obese US economy. The patient has been gorging on debt endangering the cardiovascular health of the dollar that is leading to clotting in the limbs of the global economy. I don't mean to trivialise the problem. Consider that estimates of gross global debt in the middle of last year reached $90 trillion which amounts to 300% of world GDP. If that is not concerning enough, be worried that the debt pile has been growing two to three times faster than GDP in the last half-decade. The US epitomizes the excesses with a ballooning trade deficit ($1bn per day), asset inflation and astonishing private indebtedness. Things are clearly out of kilter and the pessimists point to a crisis because there has been no reciprocal adjustment in the foreign exchange values of the dollar. Causally, the case against the dollar at its present values is compelling. However, speculation about what happens in the wake of dollar depreciation is less impressive. We have been badgered for some time about the relationship between the dollar and gold. It is taken for granted that a weaker dollar translates into a stronger gold price. More simply, the dollar and gold are seen to be in competition. Applying common sense and some basic knowledge, I sought to test the relationship and found little evidence for one. Have a look at the chart: Open attached link- I'm sure there are many ways to fault this chart and I hope someone does. However, by reducing the arguments to their most basic numerical parts, there's clearly nothing that would excite a statistician. Nor would or should a gold trader get enthused about predicting price movements. If the relationship between gold and the dollar lacks extrapolative integrity, why do we take it for granted? Perhaps it is because gold bugs are more successful than we give them credit for. They have persuaded many people that gold is the obvious and sole alternative in the event of a global financial crisis. The problem is that the dollar has been isolated from the whole structure of the international political economy and it is now assumed that the dollar is the only pulse point. But, for as long as the powers that be are able to maintain a semblance of stability in terms of asset and price inflation (ignore the "artificiality" of it all if you're a conspiracist), gold will always be just another investment option rather than an automatic refuge. Yes, the central bankers have been wonderfully clever in diminishing the monetary role of gold and where better to see that and back up the conclusion drawn from the chart than to look at the yen-dollar exchange rate. In April 1998 the yen touched a long-time high of 145 to the dollar. Within 18-months the rate had plummeted to 100 to the dollar and yet there was none of the capital evacuation from the US doomsayers were predicting. In many ways, that event was pivotal to our understanding of the role of gold as money. Japanese investors have been staunch financiers of America's deficits and the country's diligent savers have an affinity for gold as a store of value. Yet a 31% depreciation in their dollar assets did not cause a flight to bullion. That is what the world's investors have bet on for nearly two decades and it's why gold miners are happy to hedge against price declines. In future, I'll pay much less attention to imputing the price of gold from exchange rate movements. Or should I? Best Regards, J.T.