“The natural tendency of government, once in charge of money, is to inflate and to destroy the value of the currency.”

– Murray Rothbard

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August 29, 2024 – We’ll be brief today. 

In overnight trading on Tuesday, gold popped to another new all-time high of $2,562. This morning, it made another attempt, topping out in early trading at $2,558. 

We’ve been watching the price of gold with keen interest for several years. The main drivers have been consistent since gold settled above $2,000 in late 2020 during pandemic fear buying.

Rising interest rates should have been bad for the gold price, but they weren’t. Geopolitical tensions have been heightened since the Russian invasion of Ukraine in 2022, exacerbated by the Oct. 7, 2023 commencement of a hot war between Israel and Hamas. Still…

As early as December 2023, Louis-Vincent Gave, a macro analyst we’ve been following since the early days of The Daily Reckoning, speculated that above central bank buying of gold, the real driver of demand comes from wealthy consumers in emerging markets. Per Bloomberg:

On a quick romp across the big emerging markets, Gave concludes the following: India is a big buyer of gold, and this will probably continue as domestic wealth grows, despite competition from domestic stocks.

The “de-dollarization” argument then starts to come into play. China may be keen to buy gold as a diversifier away from U.S. government debt, for example. It’s a similar — though even more marked — story for Russia. Citizens of both countries may also see gold as one of the better ways to store wealth outside of a financial system that they don’t necessarily trust.

In a similar vein, Gave also notes that Saudi Arabia signed a renminbi “swap line” with the Chinese central bank. If the Middle East is edging away from the U.S. dollar, then that, as Gave puts it, makes “currency uncertainty” a live issue for investors in the region, which in turn is another tailwind for gold.

This week’s headlines announcing increased military action in the West Bank are further stoking concerns of a wider war in the Middle East.

And now, with the Fed’s pivot toward lower interest rates clearly on the table in September, the continued rally in gold’s price seems more evidently dependent on the price of the U.S. Dollar globally than on “wealthy emerging market” buyers … or even purchases from central banks in Russia, India and China. 

Since the dollar and its valuation is a funny thing indeed, we can’t help but share the thoughts of our quirky friend, financial writer and comedian Dominic Frisby. 

Dominic is specifically looking at where the dollar index is likely to go… but for our purposes, its impact on gold is even more interesting. Enjoy ~~ Addison

The Most Important Price In the World 

 

Dominic Frisby, The Flying Frisby

Now we look at what must be the most important price in the world: that is the price of the global reserve currency, the US dollar.

Does it go up or down from here?

There is probably no more important question in global finance to know the answer to.

If the dollar is falling, it usually signals boom times for assets: equities and commodities especially. The US prints and spends, and then exports the inflation. Money gets loose and the party rocks.

But when the dollar is strong, everyone gets the jitters.

Today the US dollar is seriously oversold. Meaning, it should go up from here.

Conversely, the inverse trade—gold—is at all-time highs. US equity markets are flirting with all-time highs, while the euro and the yen, even the pound, have been soaring.

Let’s start with US dollar index, which tracks the dollar against the currencies of the US’s main trading partners’, over the past year.

Look at the relative strength index (RSI). The RSI is an indicator designed to measure an asset’s momentum, which is both the speed and size of price changes. Technical traders include the RSI when trying to determine if an asset is overbought or oversold. 

The following is a chart measuring the RSI for the US dollar over the past two years:

The RSI has gone beneath 30 for the first time in over a year. You would typically expect a reversal from these levels.

Look at the 3-month rally the dollar had starting in July 2023, the last time it was this oversold, it was quite something.

In fact, based on this, I have taken a small short position in cable, betting that the dollar will rise against the pound.

Last week, Fed Chief Jerome Powell indicated that the Federal Reserve is now ready to start cutting rates, which should be bearish for the dollar. However, oversold is oversold.

“The time has come for policy to adjust.” he said. “My confidence has grown that inflation is on a sustainable path back to 2%.”

The market is somewhat divided as to whether that cut will be 0.25% or 0.5%, but lower rates go. The inflation—by their definition—monster has been tamed.

“The 2-year yield has fallen to 3.9% compared to base rates at 5.5%, which is the bond market’s way of pricing in future rate cuts,” says Charlie Morris at Bytree. 

“The difference, at -1.6%, means that a full rate-cutting cycle lies ahead. Indeed, this reading is more pronounced than seen in 2001 and 2008, implying the cuts could come thick and fast.” 

Both 2001 and 2008 were major turning points in the US dollar. And this time around will likely be a good sign for the price of gold. ~~ Dominic Frisby, The Flying Frisby

 

So it goes, 

Addison Wiggin, 

Grey Swan

 

P.S. Since 1985, the dollar has declined with the Republicans — Reagan, Bush x2 and Trump — and rallied with the Democrats — Clinton, Obama, and Biden.

Who wins in November has a big impact on the price. But there are several months to go till November. And with the “vibe” election in full swing — a lot can change in just a few weeks. And we expect it will. 

P.S. Please send any additional questions you may have about gold and bitcoin, or any comments you have on rights, to addison@greyswanfraternity.com.