It’s a truism in commodities markets that the dollar and gold have an inverse relationship. Thus when the gold price is strong, the dollar is weak. And vice versa.
We saw this dynamic clearly during the era of quantitative easing that began after the global financial crisis in 2007, when gold eventually pushed up towards the US$2,000 mark, while the dollar itself weakened steadily in a race to the bottom with all the world’s other major currencies.
Still, it’s worth remembering that even before 2007, the gold price had been strengthening for a number of years. Back at the beginning of the current millennia, at around the year 2000, the gold price was not much more than US$300 an ounce. In the decades prior, dating all the way back the end of the gold standard, it had only once gone above US$800, and then not by much. Indeed, it had only gone above US$500 one other time before the bull run that began in the early 2000s.
And that bull run had already built up a considerable head of steam before the global financial crisis hit, with gold pushing past US$700 in 2006 – only the second time in history it had ever been that high.
But why is all this history relevant today?
Consider the following, in the context of that vaunted inverse relationship between the dollar and gold. As we are now, in late September 2022, the US dollar is at a 20-year high, while gold is only at a two-year low. The relationship may be inversely proportional to some degree, but it certainly seems as of this moment that the proportions are not 1:1.
Now, it’s often said that the current times are exceptional - Russia has invaded Ukraine, and inflation is once again on the march. But what times aren’t exceptional? The times that the current reckonings tend to begin with – when President Nixon abolished the gold standard in the early 1970s – certainly were exceptional. Back then, the US was losing the Cold War, inflation was running riot, Vietnam was winding down and OPEC was holding the western world to ransom.
Since then, oil crises have come and gone, as have all sorts of other crises, from the Iranian Revolution to the end of the Cold War, to wars in the Balkans, the Middle East and on and on, up to covid and beyond. There is nothing exceptional about living in exceptional times.
Or, to put it another way, things currently are about as normal as they’ve ever been.
And yet – gold is still trading at around three times the level it tended to trade at in the 1980s, 1990s, and early 2000s.
What does this tell us?
First, that in the long run gold remains as safe an asset class as you can possibly think of. Second, and perhaps more meaningfully, that the depreciation of the US dollar has also been long-term, no matter what impression the headlines about that 20-year high give.
That the dollar isn’t the force it once was is widely known. Crypto currencies may or may not work in the long-term, but the very fact that they’re being tried says a lot. Not only that, but most buyers are in the western world, which is supposed to be relying on the rock solid dollar.
More seriously, significant global transactions are beginning to take place in other currencies. Back when Nixon took the gold standard out of the equation, US foreign policy makers were careful to secure an understanding from Saudi Arabia that oil trades would continue to be denominated in US currency. That continues to be the case – for now. And by and large.
But note that India is doing some hydrocarbon deals with Russia in a currency other than the dollar. And that China is experimenting with a range of alternatives when it comes to the purchase of the multivaried commodities suite that it needs to keep its huge economy running. Russia has been pushing hard for payment in rubles from its European customers – and why not? – it has the product to sell and a currency it wants to be paid it. In those terms, it’s hardly the blackmail that some of the more jingoistic press paint it as.
So, while the dollar remains the single most potent force in international finance, it’s no longer the only option. Cracks in the edifice of US financial hegemony are beginning to show. And that’s why, although the dollar is running rampant against the other major currencies in the world, the same can’t be said of gold.
It may be pessimistic to hold gold, but it can’t hurt to tuck some away.