SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD PRICE MOVING UP AGAIN – US DOLLAR “STRENGTH” DOES NOT PREVENT FURTHER GOLD UPSIDE

Gold finished 2016 up about eight percent in US dollars, up more in most other currencies. However, the steady decline, especially priced in US dollars, from November 9th until about December 23rd pared the much more substantial yearly gain going into the US election.

The gold price spiked from about $1280/oz.  to about $1330/oz as the shocking election results came in around midnight of November 8th, then retreated by the morning of November 9th, and closed down on the day. It is worth noting that paper contracts (futures and options) representing something like 6,200 physical tons of gold, more than two times annual worldwide production traded in the several days after the election. While it is common that “paper” trading volume in all commodities is substantially in excess of actual physical product movement, this is a ridiculously high ratio. This is representative of the extraordinary speculative activity that takes place between often leveraged short term traders, as “price discovery” of this often emotionally driven commodity and currency takes place. Stop loss orders get triggered as algorithm driven computers make transaction decisions based only on price chart patterns, having nothing to do with physical supply and demand. While it is true that physical prices and paper prices must converge over time, distortions can (and do) take place in the short run. In fact, there have been consistent reports since November 9th, of physical gold changing hands at substantial price premiums, especially in China (with ongoing accumulation by the public and government alike),  and India, with their recent paper currency chaos (see our January 3rd report). The important point of this discussion is that the short term downdraft in price seems to have run its course at this point, and the price patterns that looked horrible to every chartist seem to be correcting themselves. Should the price improvement continue, all the chart driven analysts that have been predicting continuation of the decline  will be increasingly aggressive buyers on the upside. I’ve studied charts over many decades myself, and price declines such as we have witnessed, from $1330 the morning of November 9th to about $1130 a few weeks ago, take time to repair, but the timing is always uncertain. So far, the price recovery from $1125 to about $1200, about 6.5% in about a month, has been steady, about the same pace as the decline in the prior month or so, and could well be sustainable. There are lots of fundamental reasons that gold could have a good year in 2017, which I discussed on this website on January 3, and will continue to present in early February.

It is important to realize that, contrary to popular opinion, the gold price can do just fine, over a reasonable period of time, no matter what the US Dollar is doing relative to other currencies. The punditry press almost always uses “strength” in the Dollar as one of the reasons that gold has been down for the day, the week, the month, or even the year. US dollar “strength”, normally referenced by the “DXY”, an ETF comprised of a basket of other currencies. When the DXY moves up, the US Dollar is more valuable relative to that basket, and gold priced in Dollars will perform worse that gold priced by that basket, or individual currencies that are relatively weak to the dollar. For example, if  Yen goes from 100Y to the Dollar to $125Y to the Dollar, and gold stays the same in Dollars, it will take 25% more Yen to buy the gold, and gold has done 25% better in Yen terms.

So…gold can do well or badly, in none, some, or all currencies, over a period of time, and the performance will be different depending on the relative currency performance. The bottom line, recently, is that gold was up about 8% in US Dollars in 2016, but up 29.6% in Pound Sterling, up 16.3% in Yuan, up only 5.3% in Yen, up varying amounts in almost all important trading currencies, down 10.9% in Brazil.  Therefore..when the Dollar is relatively strong, and the commentators say gold can’t go up, they should explain…perhaps poorly relative to other currencies, but can go up nonetheless. Furthermore…gold can go up or down in all currencies over time. The US Dollar can be the best house in a bad (currency) neighborhood, but the whole neighborhood can go south as central banks dilute their paper currencies relative to gold as an alternative store of wealth and medium of exchange.

2016 is a recent example of how gold went up in US Dollars, even in the face of a relatively strong dollar. More dramatic is the longer time period, from 2000 until 2016. During that period, the US Dollar, represented by DXY, traded from 100 to 120 to 78 and back to 100. Gold started at 300, traded as high as 1900, and trades today around 1200. DXY therefore, has basically marked time over 16 years, and the gold price has quadrupled, priced in US Dollars. During that same time, the price performance of gold has also been up, very substantially, in all major trading currencies. In almost all currencies, gold improved in price in 12 or 13 out of the sixteen years, ending far more valuable than at the beginning. So the whole (paper currency) neighborhood suffered, relative to gold. It is interesting, perhaps surprising,  that gold, priced in Russian rubles (which have been weak relative to the US Dollar) has gone up TEN TIMES in value over that 16 year period. This may be one reason why Russia, even with all its economic trouble, has been steadily, and substantially, adding to gold holdings, basically expressing a conviction that gold will be increasingly more valuable than rubles.

In summary, don’t believe that gold “cannot go up in price if the US Dollar is strong”. The increasing value of gold has, it can, and it will, be exacerbated by the lack of political will to get our fiscal and monetary house in order. Personally, I don’t see how the US ( or the world, for that matter) can extricate itself gracefully from the financial mess we are in. The problems can only be “papered over” for so long. Of course, how long is “so long” remains the question.