The other day I posted my thoughts on inflation, and whether we should expect a resurgence.
To follow up on that I thought I would take a look at the ole Dollar/Gold chart and see if it was providing any signals.
In general, when expectations are for higher inflation, Gold will outperform the Dollar. When inflation expectations are low, the Dollar will outperform Gold.
In recent years, another player came into the market… Bitcoin. So, we are going to have a look at the Dollar/Bitcoin chart as well.
First up, Dollar/Gold…
On this chart, the Dollar Index is the black line and Gold futures are the red line.
You can see that there is a general, inverse relationship between the two. When the Dollar is declining in value, gold tends to rise, and vice-versa.
After the collapse of the Dot.com bubble, the Fed started up the printing presses, and gold came out of its long slumber.
This major bull market culminated with the top in 2011, when deflation was in firm control globally.
In 2019, Gold started rallying again as the Fed started cutting interest rates after getting too aggressive with rate hikes in 2018.
Gold then peaked in 2020 after pricing in higher inflation due to the Fed response to the Covid-19 shutdown. The rally in gold was somewhat muted since the money printing initially was offset by the steep global recession.
A major rally in the Dollar then began, and Gold went into a period of consolidation. The Fed rate hikes lowered the overall rate of inflation over the last year.
Over the last couple of months, the Dollar has rallied, but Gold has effectively traded sideways and now appears to be poised to move higher.
If it appears that the Fed is unwilling to hike rates much further, but inflation remains hotter than expected, then Gold should rally, and the Dollar should decline.
We’ll need some more data to see how it all turns out, but right now, Gold is more appealing.
But, what about Bitcoin?
A few years ago, Bitcoin was going to replace the Dollar. I was never onboard with that idea, because governments around the world are too greedy and would never let that happen. They need their tax revenues.
So, Bitcoin no longer appears to be the go to currency when the Dollar is weak. As the Dollar declined from September 2022 into this summer, Bitcoin didn’t manage to even recoup 50% of the decline from its peak.
And, in recent months, as the Dollar has rallied, Bitcoin dropped over 20%. Meanwhile, during that same Dollar rally, Gold only declined by about 5%.
I should also mention that during this same time frame, Silver only dropped about 10%.
With all this in mind, it seems to me that we should be paying close attention to the Gold market going forward.
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