Thursday, November 1, 2007

Technical Thursdays: The Dirtier the Dollar, The More Gold Shines

Blog entry from July 12th: “Forget Goldlilocks, Think Gold”
Blog entry from April 24th: “Gold: The $1,000 Investment”*

The first chart** shows the performance of the yellow metal versus S&P 500 since July 12th. No question about that call.
The second** is the price performance of Gold since the Gold tracker began trading. So far, so very good.

However, being right is always yesterday’s news. What about now? Is $1,000 achievable? In a word: youbetcha.

A few follow up thoughts:

Since my March 2005 report on Gold, the central argument for Gold has been the US dollar and its diminishing role of the world’s reserve currency. That view not only remains unchanged but is actually accelerating. The debasing of the American currency (via the Fed and its propensity to run the printing press to avoid even the slightest real economic pain) coupled with the strong growth in foreign reserves is driving many holders of dollar denominated assets (US Treasuries, in particular) to think twice (three times, four times?) about adding to a losing position. Yesterday’s ¼ point rate cut, the Fed's second best decision, contributes to the situation.

To leave the Fed funds rate unchanged was the better choice. However, the Fed's intentions are clear - rates are headed lower. And no matter how you slice it, lower US rates only reinforce the downtrend in the dollar. So, while the dollar may be poised for a crowded trade, short covering rally, the mega and cyclical trend is unmistakable: Down and dirty. And the dirtier the dollar gets, the less inclined foreign buyers will be to own more of a poor performing asset and more inclined to diversify their holdings. Witness the rise in sovereign wealth funds. Witness the rise in the Euro. Witness the rise in Gold.

Investment Strategy Implications

The slow, steady crash in the dollar threatens to get out of hand. Heaven help us if it does. And while no one knows what level a relatively non-productive asset like Gold should trade, it is without question that Gold is benefiting from the diversification effects of major buyers of dollar denominated assets.

Conclusion: Up to a 5% position in Gold belongs in everyone’s portfolio for the foreseeable future.

*Scroll down to "Topics Discussed" links to your left to view.
**click on images to enlarge.

1 comment:

David Wozney said...

Re: “... the central argument for Gold has been the US dollar and its diminishing role of the world’s reserve currency.

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as having the value of 1/42.2222 fine troy ounces of gold.