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A Monday Morning Musing from
Mickey the Mercenary Geologist
The price of gold has been range-bound from the low $1200s to the upper
$1000s per ounce since early February of 2015. There is one simple reason for
the low volatility and lack of significant price movement for the most
precious metal over the past eight months: the strength of the US dollar.
In a series of musings late last fall and winter, I discussed correlations
between the dollar and hard commodities.
There was an extremely strong negative correlation between the US dollar
index (DXY) and gold from July 11, 2014, when the dollar began its concerted
march above 80.0 to December 18 when it closed at 89.6.
A negative correlation with DXY is the usual paradigm for gold and the
other two major resource commodities traded on world exchanges, oil and
copper. This is because trades are quoted and settled in US$, both as
physical goods for delivery and as speculative derivatives.
However, from December 19 to February 13, an unusual positive correlation
existed for gold and DXY:
As I documented at that time (Mercenary Musing, February 16, 2015), a rising
dollar accompanied by a rising gold price is extremely rare and last occurred
during the global economic crisis in early 2009.
But beginning on February 16 and continuing to the present day, there has
been very little correlation between the price of gold and the US$. Take a
look at this scattergram:
On the other hand, both oil and copper have continued to exhibit strong
negative correlation with DXY since that pivotal day last July. This has
occurred despite an increasingly range-bound dollar for the past few months:
After the dollar index rose exponentially from 80 to above 100 in eight
months, it quickly topped, fell back, and has been range-bound between 94 and
98 since mid-April:
After a nearly 20% rise over the past 15 months, I see little evidence for
a significant upside or downside swing for the US dollar in the short term.
Reasons include:
·US economic growth will continue to be tepid and the Fed seems unwilling
to raise interest rates even a quarter per cent.
·The world's economy is being fueled by fiat currency devaluations, zero
interest rates, and an ever-increasing debt load, now 40% higher than during
the financial crisis of 2008. Current safe havens are the $US and its
treasury bonds.
·Currency weakness will continue for those whose export revenues are
commodities-driven (e.g., Aussie and Canadian dollars, Chilean peso, and
South African rand).
·The Euro will remain compromised as long as Germany serially props up a
consistently expanding contingent of bankrupt countries.
·In China, slowing growth, a major stock market correction that remains
unfinished, and recent devaluations of the yuan to stimulate exports will
negatively impact that country and other emerging markets in the Asia
Pacific.
·Japan's fundamental economic flaws have no solution. They include two
decades of deflation, a stagnant stock market, an aging demographic profile,
and a self-imposed balance of payments deficit incurred by idling of its
nuclear energy fleet and importing more fossil fuels.
The good ol' greenback is still the best of all currencies but, in my
opinion, it had its run and will now continue to consolidate.
With respect to gold, it has not reacted to significant geopolitical
unrest in several regions of the world over the past year, including several
new conflicts in the Middle East, the Russia-Ukraine civil war, higher
incidences of radical Islamic terrorism, and most recently, a refugee crisis
in Europe.
Gold has seemingly become immune to world events except when the Swiss
franc was floated against the Euro in mid-January. That repricing caused gold
to hit $1300 for one day and stay above $1250 for a little more than three
weeks of trading.
Since then, the price of gold has not approached $1250:
Widespread fear and panic in the financial markets is often a catalyst for
gold buying as a safe haven and results in a rising gold price. But that will
occur only if investors lose confidence in the world's banking system as they
did from late 2008 to late 2011.
Annual price inflation remains very low in developed countries despite the
devaluation of major fiat currencies. The world economy is undergoing a
deflationary event and that does not bode well for a significant rise in the
gold price.
Lower gold prices in mid-July to early August and the recent upticks can
be attributed to seasonality, i.e., the usual summer doldrums followed by the
Indian festival and wedding seasons. I also expect strength in gold as the
December holidays approach.
But for the short-term, I see no compelling reasons for gold to break out
of its year-to-date range.
Let me sum up my position in two sentences, folks:
Gold ain't goin' anywhere anytime soon unless the US$ takes
another exponential run-up or a great big nosedive.
And I don't think either of those events is about to happen.
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgments: Gwen Preston is the editor and Steve Sweeney is
the research assistant for MercenaryGeologist.com.
The Mercenary
Geologist Michael S. "Mickey" Fulp is a Certified
Professional Geologist
with a B.Sc. Earth Sciences with honor from the University of Tulsa, and
M.Sc. Geology from the University of New Mexico. Mickey has 35 years
experience as an exploration geologist and analyst searching for economic
deposits of base and precious metals, industrial minerals, uranium, coal, oil
and gas, and water in North and South America, Europe, and Asia.
Mickey worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for over 20 years,
specializing in geological mapping, property evaluation, and business
development.In addition to Mickey's professional credentials and experience,
he is high-altitude proficient, and is bilingual in English and Spanish. From
2003 to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile,
and British Columbia.
Mickey is well-known and highly respected throughout the mining and
exploration community due to his ongoing work as an analyst, writer, and
speaker.
Contact: Contact@MercenaryGeologist.com
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