...Gold and USDX
Adam Hamilton 
Archives
Jul 27, 2007
Over the past couple weeks the financial markets have burst free from their usual summer doldrums to provide some welcome excitement. Prices that have long seemed locked in stasis with trivial daily moves are now witnessing dramatically increased volatility. It is great to see the markets getting interesting again!
While mainstream attention remains focused on the rising amplitude and frequency of down days in the general stock markets, the volatility in the currencies has also accelerated considerably. As a dollar-denominated American investor and speculator riding the secular gold bull, I've found the behavior of gold and the US Dollar Index particularly intriguing lately.
Gold, of course, has been the ultimate form of money all throughout history. Its immutable intrinsic value has transcended every era, government, and currency the world has ever seen. Gold is the perfect form of money because it is universally prized and is rare in the natural world. This scarcity of gold ensures that world supplies only grow around 1% a year on average over centuries, so it is immune from inflation...... more....
And there certainly was a reason for this lockstep opposition. Gold bulls have three stages.
The first stage is driven by a currency devaluation. The dominant currency, in this case the dollar, grows weaker which gets early contrarian investors interested in gold again following a long gold bear. During Stage One, most of the time dollar weakness indeed was the primary driver of gold just as people wrongly assume it still is today.
Eventually Stage One matures and investors start to pursue gold for its own fundamental merits.
This ushers in Stage Two when gold starts rising on its own global investment demand independent of whatever the dollar happens to be doing.
The transition zone from Stage One to Stage Two is marked above on this chart. It happened in mid-2005 when gold held stable despite a powerful USDX rally.
Since mid-2005, we have definitely been in Stage Two of this gold bull.
There are several empirical ways to verify this fact on this strategic chart. First, from 2005 to today, the r-square between gold and the USDX plummeted to 18%. Thus only 18% of the daily moves in gold were statistically explainable by opposing moves in the USDX since early 2005. 18% is not much, virtually uncorrelated, and is a radical departure from the 92% witnessed from 2001 to 2004. These are obviously entirely different environments.
Second, the last time the USDX approached its long-term support at 80 in late 2004, gold was trading near $450. Today with the USDX once again approaching 80, gold is trading nearly 45% higher near $650.
If the dollar remained gold's primary driver, then gold would probably be back at late-2004 levels today.
Clearly something else is driving gold demand besides dollar weakness.
Finally, gold has powered 181% higher in its bull to date while the dollar has "only" fallen 34% in its bear to date.
Gold's strength is outperforming the dollar's weakness on the order of 5.3 to 1.
The dollar bear alone is nowhere near devastating enough to account for the impressive early-Stage-Two strength in gold.
The bottom line is the dollar's impact on gold is now only a shadow of what it once was on a purely technical and fundamental basis.
We have moved on into Stage Two where international investors bid up gold on its own fundamental merits independent of the dollar bear. Despite this, the dollar's fortunes still have a big sentimental impact on gold futures traders and hence the tactical gold price.
So while dollar weakness is no longer necessary for gold to power higher, its lingering psychological impact could make a sub-80 slide look like gasoline thrown on a fire. 
As gold approaches its seasonally strong time of the year and the dollar threatens to plunge to new all-time lows, it should generate a lot of positive sentiment for gold. ![:]](https://goldseiten-forum.com/wcf/images/smilies/pleased.gif "Freude"){kind=small}
This can only help gold, silver, and the PM stocks in their coming upleg.
Adam Hamilton, CPA
