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The U.S. Dollar Index is made up of a basket of [6] currencies that 
are, themselves, not static and, indeed, are involved in various forms of debasement as nations have taken the view that a weaker currency will boost their exports. As each nation enacts such policies, the result is gridlock, as every action taken to weaken one’s currency is neutralized by a similar action taken by the competing currencies. That is currently what is happening with the constituents of the U.S. Dollar Index and why, as such, the U.S. dollar has not weakened. [Given the fact that] gold tends to have an inverse relationship with the dollar, and has increased when the value of the dollar has declined, we could, as a result, continue to see a capping in the advance of gold prices, at least in dollar terms. [Let me explain in further detail.] Words: 804; Charts: 1
So writes Bob Kirtley (www.gold-prices.biz) in edited excerpts from his original article* entitle Gold And The U.S. Dollar.
This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Kirtley goes on to say in further edited excerpts:
(click to enlarge)
The reason for this is that the U.S. Dollar Index is made up of a basket of currencies that in themselves are not static and indeed, are involved in various forms of debasement as nations have taken the view that a weaker currency will boost their exports.
[According to Wikipedia:The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.
It is a weighted geometric mean of the dollar’s value compared only with
- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight and
- Swiss franc (CHF) 3.6% weight
USDX started in March 1973, soon after the dismantling of the Bretton Woods system. At its start, the value of the US Dollar Index was 100.000. It has since traded as high as 148.1244 in February 1985, and as low as 70.698 on March 16, 2008.]
Japan, for instance, has recently elected a new government whose mandate is to avoid deflation by printing more paper money in order to boost their economy and increase exports via a cheaper yen. As we write, the European Union is meeting to discuss the strength of the euro and the effect that it is having on their ability to export goods.
As each nation adopts similar policies, the result could be a kind of gridlock, as every action taken to weaken one’s currency is neutralized by a similar action taken by the competing currencies. [That appears to be, in fact, what’s happening as] we can see that, despite Operation Twist and Quantitative Easing, the U.S. dollar is sitting at the “80” level on the Index.
Gold tends to have an inverse relationship with the dollar, and has increased when the value of the dollar has declined…Therefore, if the actions of our political masters [in the constituent countries of the Index] are copied across the board, we could find ourselves in a situation where the dollar trades within a limited range for some time to come, thus capping an advance in gold prices, at least in dollar terms.
One would think that we would be experiencing a huge leap in inflation with all this paper money swamping the world [but that] is contrary to what the “official” figures suggest, that inflation is under control. This leads…[me] to conclude that, for now, the demise in the dollar is on hold and that inflation is having little effect on the price of gold.
I have difficulty believing that inflation will not come roaring back, but for now, we have to deal with what we have. [Therefore,] if gold prices are to head north, then it will be because of the fundamentals for gold, supply and demand [and, as such] consideration should be given to:
- central bank purchases,
- the Russian and Chinese imports,
- the demand for physical gold as opposed to paper gold,
- various mints running out of products to sell,
- the reduction in available scrap metal,
- the ever-increasing difficulties in mining and
- the lack of new major discoveries.
All of…[the above] suggests support for gold prices in the longer term, however, the short-term outlook is, as always, subject to volatile oscillations in both directions.
Conclusion
We need to proceed gently with our positioning in the precious metals market place, and also be prepared to weather the storm if and when it materializes.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.gold-prices.biz/home/gold-and-the-us-dollar.html
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