Gold And The Need To Explain Price Action

People are obsessed with the price of gold. And the demand for answers to the question “Why?” continues to grow. Why did gold go up/down $20.00 today? Why?

All too eager to provide the answer, journalists respond as follows: 

Quote: “A weak U.S. inflation print may be just what gold prices need to finally stay above $1,300.” …WSJ Aug 2016

Seriously? I thought higher gold prices were the result of inflation.

Quote: “Negative interest rates are sweeping the world as countries try to devalue their currencies, and that’s helping the price of gold.” …Feb 2016

The ongoing devaluation of the U.S. dollar has been taking place for over one hundred years. Gold’s continually increasing price – over time – reflects that devaluation. There is no correlation between gold and interest rates.

Quote: “Gold prices were on track for a second straight day of losses Tuesday after United Nations sanctions against North Korea were less severe than many initially expected.” …WSJ Sep 12, 2017

Apparently more severe sanctions would have led (or did lead) to higher gold prices. Why? And why do sanctions that “were less severe” lead to lower gold prices?  The answer in both cases is: they don’t.

Quote: Analysts and investors have also said that demand for haven assets has weakened early in the week because damage from Hurricane Irma was less severe than expected. Many investors favor gold during times of geopolitical uncertainty. …WSJ Sep 12, 2017

Another case of unrealistic expectations being dashed on the rocks of reality. Unfortunately, the explanation after the fact is just as bad as the original expectation.  Contrary to the statement above, gold is not influenced or affected by “geopolitical uncertainty”; regardless of what investors think.

Quote: Gold prices climbed Thursday after the European Central Bank left its accommodative monetary policies in place. …WSJ Sep 12, 2017

Any other central bank’s actions are still secondary to the U.S. Federal Reserve Bank and its actions concerning the U.S. dollar. Actions by other central banks are more properly viewed in the context of their own respective economies and/or relative to the U.S dollar. Gold’s price is the direct inverse reflection of the value of the U.S. dollar.

The underlying problem is fundamental.  Most people either are unaware or refuse to accept the one basic principle that defines and explains gold: Gold Is Real Money.

It is necessary, of course, to understand the principle more fully before attempting to answer questions about the price of gold. Further enlightenment on the subject can found here and here.

The lack of knowledge regarding gold leads to answers and explanations for price action that are illogical and incorrect. In the above examples, another factor is that the explanations are headline driven.

It is presumed that any price action of consequence must have a clear explanation. When an explanation isn’t readily apparent, check the headlines; and make something up.

Why did gold go up? New hurricane offshore. Why did gold go down? Effects of storm after making landfall weren’t as bad as expected. Gold is up again.  Well, there is another hurricane offshore and it could be worse than the last one. Nah, find another reason.  How about this? The ECB held firm on interest rates/raised rates/didn’t raise rates/changed their mind, etc.  If that doesn’t work, reverse the facts to suit the circumstances. Inflation refuses to attend the party.  Maybe gold will defy all reasonable logic and ignore core fundamentals.  Maybe gold’s price will go up while the U.S dollar strengthens.

Let’s be clear.  There are short-term, temporary changes in gold’s price that are not the result of its basic identity as real money.  And changes in the gold price occur only when someone acts on their expectations, faulty logic or not.

But those price changes are elusive and will revert to their place within the fundamental trend; namely that gold’s continually higher price over time reflects inversely the continually lower value of the U.S. dollar.

On a secondary basis, gold’s price decline since August 2011 reflects a strengthening U.S dollar.  It is very possible that trend has not reversed yet, although eventually it will.

And the more recent gold price increase since the beginning of this year is tied directly to the decline in value of the U.S. dollar. Any other explanations are simply not applicable.

Beyond that it is mostly a guessing game; at least in the very short-term. And for good reason. A plethora of faulty logic, (non)correlations, and contradictions seem to indicate more than just an ignorance of gold’s fundamental(s).

It just may be that the day-to-day changes in gold’s price are not easily attributable to known facts.

The gold market is relatively thinly traded. Even so, there are many different reasons why someone bought or sold the yellow metal on a certain day. Any specific transaction could have been initiated after weeks or months of deliberation.  And if it is spontaneously correlated time-wise with other known events, we still don’t know the reasons or logic that went into that decision.

Also, it is possible (likely?) that the traders who provide explanations to the journalists, are just as much in the dark themselves for an answer.

The only visible, consistently reliable, fundamental indicator of gold prices is the U.S. dollar. The ongoing decline in value of the U.S. dollar is reflected in an ever higher gold price over time.

Periods during which the U.S. dollar shows signs of strength and stability are reflected in lower or more stable gold prices.

Those periods are temporary. And they can last for years. The previous temporary period of U.S. dollar strength lasted for twenty years from 1980 – 2000. Don’t be swayed by the clarion call of impending riches or the fear of missing out on wealth untold.

If you really want to understand gold, focus on the U.S. dollar.  And ignore the headlines.

 

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