Gold Is Rising Worldwide

Gold has been weak over the last few days, falling back down to $1,225, as this article goes to press. The major contributor to gold's fall has been strength in the U.S. dollar since last Wednesday, when the Federal Reserve released minutes from its most recent policy meeting, hinting at a stronger chance of a rate hike at its upcoming June session. Higher interest rates tend to strengthen the value of the dollar versus foreign currencies, as investors can achieve a higher rate of return by holding US-denominated debt.

Over the short run, a stronger dollar often corresponds to weaker gold prices, as traders see less need for the age-old metallic store of wealth when the fiat dollar is firming.

Indeed, when we look at the very short-term action in the U.S. Dollar Index versus gold, we can clearly see this inverse correlation. Note how the recent high for gold, at $1,305, corresponded within one day to the low seen in the Dollar Index, at 92.5. Since then, as the dollar has risen, gold has fallen.

It is tempting to want to extrapolate this phenomenon into longer time periods. For example, what if the dollar continues to rise? Will gold keep falling?

U.S. Dollar Index - Meaningless Over the Long Run

We want to caution readers that over the long run, the value of the US dollar versus other international currencies (which is what the U.S. Dollar Index measures) has little impact on the price of gold. We must remember that in today's monetary system, for the first time in the history of human civilization, not a single currency has any direct tangible backing to it. Thus, measuring the U.S. dollar versus the Euro, the British pound, or the Australian dollar is a relative measure of one fiat currency versus another. Each currency is being debased - simply at different speeds.

Over the long run, the U.S. Dollar Index has little impact on the price of real assets such as gold, silver, land, or other commodities. We can see this when we back out our chart above to a generational time frame.

Below we show the U.S. Dollar Index and gold since 1980. We have picked the recent figure on the Dollar Index at 92, and then drawn highlights to show the corresponding gold price at other times throughout the last few decades when the index matched the same 92 level.

Note how over these decades, while the dollar index has essentially gone nowhere, oscillating above and below the 92 figure, gold has seen the following four prices: $450 in 1988, $300 in 1998, $450 in 2005, and $1,300 in 2016.

Note also that gold's high of $1,900 in 2011 did not match the dollar's low of 72 in 2008. Nor did the dollar's high in 1985 match gold's low in 1999.

The Dollar Index is meaningless for gold prices over the long run. Gold is moving independently of any relative fluctuations between fiat currencies.

In other words, gold's rise must be a worldwide event.

Gold's Worldwide Strength

When we take off our U.S.dollar-focused worldview, we see that gold has, indeed, been rising over the last 15 years in most world currencies.

What’s more, it is not only that gold has been rising in nearly every major currency; but when we study the charts, we see important technical breakouts for gold, as well.

For example, below we show the price of gold in Euros since 2001. Note that in December, gold found support right below 1,000 Euros at the rising (magenta-colored) linear trend line dating all the way back to 2005. And then in March, Euro gold sliced through its declining downtrend, which had held prices in check since 2012. Euro gold is now consolidating above 1,100 in a bullish pattern, which indicates it will make another attempt at the all-time high (1,444 EUR) within the next few years.

We see a similar setup in British Pound gold below. After bottoming near 700 in December, it broke decisively above its multi-year downtrend and is now consolidating in the mid-800's. This is another chart which indicates that the low for the bear market has been put into place and a resumption of the long-term trending move higher is now underway.

Finally, let us look at one of the strongest performances in gold, as shown in Australian dollars:

Here we note a gold price north of $1,700, or less than 10% below its former all-time high at $1,850. We also note a well-formed cup-shaped consolidation has been forming since 2011. Even though AUD gold may still need another 2 years of consolidation before breaking to a new all-time high, the idea that gold is still in a bear market is almost laughable when viewed in this currency. And, when gold finally does break out to a new all-time high in Australian dollars, it will come as a major leading indicator that the precious metal will shortly be ready to do so in other world currencies.

Summary

Gold has been weak in U.S. dollar terms recently, as the two often move inversely over the short run. However, long-term gold strength is being confirmed by multiple world currencies.

Be wary of those who claim that U.S. dollar strength always leads to gold weakness. The data does not support this. All major currencies are being debased at varying rates. As a result, gold is being accumulated by investors around the world. USD gold weakness should, thus, be seen as temporary in nature, and an opportunity for accumulation for those with U.S. dollar holdings.