Gold Market Wire
News, analysis and commentary for gold traders and investors
Gold Market Update
Gold and Dollar Rally Together
January 20, 2021 - (Gold Market Wire) - At GMW we have been at pains over the past year to point out that the oft touted "inverse monetary proxy" theory of Gold and the US Dollar was one which held in the past, but was not necessarily going to work in the future. We have clearly laid out the chart evidence over the past month.
There are many reasons for this but the fundamental one has always been that, quite simply, there is nothing to replace the US Dollar with. The Euro is a catastrophe and the Reminbi is really not ready to take that role yet. That leaves no other choice in the world. The world's debt (and boy is there a lot of it!) is priced in US Dollars. Moreover, the emerging market world, now with its very own debt problems, has borrowed huge amounts --- in US Dollars! Mostly that has been because the risk is easily laid off by lenders in the debt markets, so that's what the banks offer. (i.e. - market depth and liquidity.) But, what a trade small businesses with Dollar receipts could have had, if they had borrowed in local currency and had receivables in US Dollars. (They are the rare winner over the past decade.) Alas, few have done so.
The other (obvious) reason is that global trade is still conducted in US Dollars. The world commodity markets (and the infinitely larger debt markets) are all priced in Dollars, so settlement is in Dollars. Will all of this change in the future? Yes, it will. But it isn't changing today! And that is what the 'crowd' misses. Will it change in the next year? No, it won't. So all the talk about how the US Dollar is finished, and there is so much of that verbiage you can build a walkway to the moon with it - is flat out wrong. One day it will be right... but that day is years away.
Does all of that mean that Gold, being that "inverse monetary proxy" will then, by definition, fall as well? NO! It does not. In reality, when the going gets real tough, the opposite will happen - the Dollar and Gold will rise together. The (inverse) correlation will not play out...and that is why the Goldbugs are so wrong.
That idea, that the correlation will fail is heresy to everyone in the Gold world, and that is one of the (smaller) primary reasons we at GMW find the idea so compelling. The other is the simple fact that a deterioration of the international security landscape is likely to add more upside pressure on the US Dollar. Make no doubt about it... the Washington establishment is back. And this time it is going to make itself known like never before. And that means wars will be resumed and prosecuted. War in the Middle East to start with, and probably war around the globe before long. And that means a rising Dollar...and rising Gold. We expect to see more days like today, going forward.
Heresy to the Bugs, we know. But today's market action is truly indicating a longer term picture.