The price of gold has been
range-bound from the low $1200s to the upper $1000s per ounce since early February
of 2015. There is one simple reason for the low volatility and lack of
significant price movement for the most precious metal over the past eight
months: the strength of the US dollar.
In a series of musings late last
fall and winter, I discussed correlations between the dollar and hard
commodities.
There was an extremely strong negative correlation
between the US dollar index (DXY) and gold from July 11, 2014, when the dollar began
its concerted march above 80.0 to December 18 when it closed at 89.6.
A negative correlation with
DXY is the usual paradigm for gold and the other two major resource commodities
traded on world exchanges, oil and copper. This is because trades are quoted
and settled in US$, both as physical goods for delivery and as speculative derivatives.
However, from December 19 to February 13, an unusual
positive correlation existed for gold and DXY:
As I documented at that time
(Mercenary Musing, February 16, 2015), a rising dollar accompanied by a rising gold price
is extremely rare and last occurred during the global economic crisis in early
2009.
But beginning on February 16 and continuing to the
present day, there has been very little correlation between the price of gold
and the US$. Take a look at this scattergram:
On the other hand, both oil and copper have
continued to exhibit strong negative correlation with DXY since that pivotal
day last July. This has occurred despite an increasingly range-bound dollar for
the past few months:
After the dollar index rose exponentially from
80 to above 100 in eight months, it quickly topped, fell back, and has been range-bound
between 94 and 98 since mid-April:
After a nearly 20% rise over
the past 15 months, I see little evidence for a significant upside or downside
swing for the US dollar in the short term. Reasons include:
- ·
US economic
growth will continue to be tepid and the Fed seems unwilling to raise interest
rates even a quarter per cent.
- ·
The world’s
economy is being fueled by fiat currency devaluations, zero interest rates, and
an ever-increasing debt load, now 40% higher than during the financial crisis
of 2008. Current safe havens are the $US and its treasury bonds.
- ·
Currency weakness
will continue for those whose export revenues are commodities-driven (e.g.,
Aussie and Canadian dollars, Chilean peso, and South African rand).
- ·
The Euro will
remain compromised as long as Germany serially props up a consistently
expanding contingent of bankrupt countries.
- ·
In China, slowing
growth, a major stock market correction that remains unfinished, and recent devaluations
of the yuan to stimulate exports will negatively impact that country and other
emerging markets in the Asia Pacific.
- ·
Japan’s fundamental
economic flaws have no solution. They include two decades of deflation, a stagnant
stock market, an aging demographic profile, and a self-imposed balance of
payments deficit incurred by idling of its nuclear energy fleet and importing more
fossil fuels.
- The good ol’ greenback is
still the best of all currencies but, in my opinion, it had its run and will now
continue to consolidate.
With respect to gold, it has
not reacted to significant geopolitical unrest in several regions of the world
over the past year, including several new conflicts in the Middle East, the
Russia-Ukraine civil war, higher incidences of radical Islamic terrorism, and
most recently, a refugee crisis in Europe.
Gold has seemingly become
immune to world events except when the Swiss franc was floated against the Euro
in mid-January. That repricing caused gold to hit $1300 for one day and stay above
$1250 for a little more than three weeks of trading.
Since then, the price of gold has not approached $1250:
Widespread
fear and panic in the financial markets is often a catalyst for gold buying as
a safe haven and results in a rising gold price. But that will occur only if
investors lose confidence in the world’s banking system as they did from late
2008 to late 2011.
Annual price
inflation remains very low in developed countries despite the devaluation of
major fiat currencies. The world economy is undergoing a deflationary event and
that does not bode well for a significant rise in the gold price.
Lower
gold prices in mid-July to early August and the recent upticks can be
attributed to seasonality, i.e., the usual summer doldrums followed by the
Indian festival and wedding seasons. I also expect strength in gold as the December
holidays approach.
But
for the short-term, I see no compelling reasons for gold to break out of its
year-to-date range.
Let
me sum up my position in two sentences, folks:
Gold ain’t goin’ anywhere anytime soon
unless the US$ takes another exponential run-up or a great big nosedive.
And
I don’t think either of those events is about to happen.
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgments: Gwen Preston is the editor and Steve Sweeney is the research assistant
for MercenaryGeologist.com.
The Mercenary
Geologist Michael S. “Mickey” Fulp
is a Certified Professional Geologist with a
B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology
from the University of New Mexico. Mickey has 35 years experience as an
exploration geologist and analyst searching for economic deposits of base and
precious metals, industrial minerals, uranium, coal, oil and gas, and water in
North and South America, Europe, and Asia.
Mickey worked for junior explorers, major
mining companies, private companies, and investors as a consulting economic
geologist for over 20 years, specializing in geological mapping, property
evaluation, and business development. In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient, and is bilingual in English and Spanish. From 2003 to
2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and British
Columbia.
Mickey is well-known and highly respected throughout
the mining and exploration community due to his ongoing work as an analyst, writer,
and speaker.
Contact: Contact@MercenaryGeologist.com
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