Daily Wealth

About the Author Daily Wealth

In a nutshell, our investment philosophy here at DailyWealth is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. So our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. We believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

iShares Gold Trust (ETF): Why the Falling Dollar Could Make Gold Bulls Cheer

When the U.S. dollar is going down, the price of gold goes up. The reason is simple: it is  basic math. Gold is priced in U.S. dollars. Therefore, if  the U.S. dollar is weakening, it takes more dollars to buy the same ounce of gold.

That is the logic, anyway. But does the logic actually work in the financial markets?

Sometimes it doesn’t. As the economist John Maynard Keynes famously said, “The market can remain irrational longer than you can remain solvent.” As it turns out, the logic works here with gold and the dollar.

Gold’s compound annual return since the early 1970s has been about 6.9% a year. But when the dollar is weakening, gold goes up at 12.2% a year. Meanwhile, when the dollar is strengthening, gold only goes up 1.8% a year.

Take a closer look below:

Compound Annual Gains in Gold
All periods
6.9%
During a dollar downtrend
12.2%
During a dollar uptrend
1.8%

 

To identify uptrends and downtrends, we looked at whether the dollar was above or below its 10-month moving average at the end of a month. Then, starting at the date of that signal, we measured gold’s performance over the following month.

You can see dollar downtrends led to strong gains in gold:

 

Why is this important today? Consider that we are now in one of those times when gold has historically delivered double-digit compound annual gains.

The dollar could be starting a multiyear bear market,” my colleague Brett Eversole wrote yesterday…
The greenback recently hit its lowest level since early 2015. It has now clearly broken down from a multiyear uptrend…
Major currencies tend to move glacially. They have slow, long-term moves higher or lower… not drastic crashes or spikes.

So this year’s decline isn’t something that happens often. The dollar is down 9% in just the first eight months of the year – a massive fall for a major currency.

 

My colleague’s conclusion was that the dollar could decline for the next two years.

If that’s true, then gold could be starting a multi-year bull market.

For now, do not be too worried about the short-term fluctuations. We actually think the dollar could go up a bit more before it resumes its fall. Yet, the dollar’s long-term trend is clearly down. The time has come- we are finally on board with gold again. If gold could be starting a multi-year bull market, you will want to be on board the gains train too.