When I first learned about investing, one of the things I learned was that gold goes up when inflation goes up because gold is immutable money and if paper money goes down, gold goes up in deteriorating paper money.
It’s an investment of 101.
The problem is that inflation has been flat in the past and gold has gone up a lot, but now inflation is OK, and gold isn’t going anywhere except falling.
Here is the chart:
So what does it give?
I was also scratching my head, but something gave the game away and suddenly explained everything. While gold was going down, my ETF position was making me money. How is that? I am denominated in British pounds. So while I was hurting in dollars I was smiling in the currency in which I consider my wealth to be measured. I can buy more warm beer even if I can buy less Budweiser with my gold.
Gold rose in British Pound Sterling.
Now we’ve all read for years how the dollar is going to die. How the dollar is doomed to decline. How will it lose priority to yuan, euro, crazy UN money and of course bitcoin. Well, the dollar was tearing it up on the world currency scene, crushing everything that came before it.
This is of course due to the Federal Reserve and its quantitative tightening (QT).
So the story goes like this: inflation is going up, interest rates are going up, QT is coming in, the dollar is going up. Why would you care about gold when the currency itself is on a rampage? Gold is this very holey thing, and it’s basically mined out of foreign currencies somewhere, yet it’s denominated in dollars. Gold did not fall, the dollar rose.
So inflation is going up, the dollar is going up, and gold (at least for now) is going down.
Do not believe me? Well, take a look at the movement of gold on September 13, 2022 when the inflation numbers soared:
Gold goes down because the market is seeing higher interest rates, higher dollar, and therefore lower gold.
Remember, bad news is good news. But bad news can be bad news. At some point, the situation reverses.
Will it turn against inflation/strong dollar? You may not have to.
Dollar is strong enough and last week the market indicated that enough dollar strength was enough.
The United States cannot allow a runaway dollar because while it will kill inflation quickly, it will also kill the economy. As I've written here many times, low inflation is unlikely to be desirable just because the deficit needs to be eroded. If you are right, this reaction will be short and you will be told "bad news is good". Then in time, "Good news will be bad" and even soon enough, "Good news will be good."
If inflation isn't going to peak now, or if the dollar's rally is going to be here and about, then gold is going to go higher.
You don't have to be a genius to keep track of whether gold will rise or die because it is very clear in the graph:
W will make or go bankrupt. I admit I have a lot of exposure to gold, so you can guess my conclusion.