A new trend in Gold

(click to enlarge images)





The chart above compares the price action in the US dollar Index with the price action of Gold. The relationship of the two has until now been predictably inverse. A fall in the dollar corresponded to an incease in the price of Gold, and a stronger dollar surpessed the price . The basis for this relationship is well understood. Jewelry is responsible for 60% of the Gold market. A weaker dollar buys less Gold, Oil, Cotton or Corn. In this respect Gold acted as a commodity responding to changes in the purchasing power of the US Dollar.

A new relationship appears to be emerging as seen above. Gold has recently appreciated in concert with a strengthening Dollar. While the trend is still very new it implies a shift in the collective mindset of Gold investors. Gold is beginning to behave more like money and less like a commodity. Gold as money behaves differently than Gold as a commodity. If you held your savings in Icelandic Krones you would have experienced an 80% loss in the 2008-2009 economic meltdown. If instead you had the same savings vested in Gold you would not have suffered any loss, instead experiencing appreciation.

Gold has interenational value irrespective of any one currency. In retrospect the structural imbalances inherent in the Icelandic Banking system make their money depreciation now seem all but obvious. Fast forward to the current crisis unfolding in Greece, Portugal, Spain, Ireland and Italy and you see why the metal has become popular again. These countries carry unsustainable debt burdens that are manifesting themselves in the Bond and Currency markets. Fearing another Iceland, savers are turning increasingly to Gold for safety. The party in Europe is just getting started. Japan and the US are in equally bad shape. Investors are beginning to view Gold as a savings of last resort.