I’ll tell you up front that I can only answer the first part of this question clearly. We’ll have to struggle with the second.
There are many forces interacting in the gold market, but for the last few years, gold has been trading in its role as a commodity. It’s priced in US dollars, and has been driven—inversely—by the dollar. You can see this strong relationship in the chart below. The dollar rises, gold falls. The dollar falls, gold rises.
The inverse correlation is even stronger over the last year, as you can see in this closeup.
So the dollar is driving gold, and all we have to do is wait for the dollar to go down, and gold will go up, right?
Well, yes—but there’s more to it.
As you can see in the next chart, which covers the last 45 years, the overall inverse relationship holds true over the longer term. There are, however, periods when something else very powerful takes over. Gold rose with the dollar in the early 1980s, briefly in the early 1990s, and after the crash of 2008. The spike of 1979-1980 was, of course, completely disproportionate to the dollar’s moves.
This shows there are times when a large-scale “flight to safety” in the markets can drive both gold and the dollar upward. Large-scale system shocks can change the way people see gold—from just another commodity to a safe-haven asset. When that becomes the dominant trading force, gold rises, with or without the dollar.
I want to stress the last point because of all the crazy things that have been done by central banks since the crash of 2008. It’s possible—I’d say likely—that we’ll see a time in the future in which flight-to-safety thinking sends real safe-haven assets soaring, while all paper currencies tank, including the dollar.
When might that be?
I can’t honestly tell you I have a good answer. Many smart people with more years as investors than I have, have made predictions that haven’t come true.
What I am sure of is that it will happen, and that when it does, it will be like an avalanche. I want—and have—the security of owning precious metals now. I’ll hold them as long as needed. I’ll look to buy more if they get cheaper in the interim. I do not want to be trying to build a position in precious metals after the avalanche starts.
In the interim, I can profit from the volatility in metals prices—which is magnified by the movements in share prices of related companies. This has worked well for me so far this year, and I’m looking forward to more and better, going forward.
