Stocks were a bit of a snoozefest overnight.
The Dow fell a bit.
The NASDAQ (of course) rose a bit.
As a result, Aussie stocks are set to open down slightly, but who knows where the day will end up?
So for today’s Rum Rebellion, let’s talk about gold and the US dollar.
Long term, I’m bullish on gold. I have been for a long time.
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Is gold too popular?
But shorter term, the situation is harder to read. Is gold too popular right now? Does it need a decent correction to shake out the punters before it can go on to new highs?
And where does the US dollar sit in all this?
Earlier this week, former Morgan Stanley Chief Economist Stephen Roach said the US dollar will almost certainly collapse under the weight of ballooning deficits and the reversal of long-term globalisation trends.
The idea of a US dollar collapse is so intuitive and emotionally appealing that it is accepted by many as a near certainty.
But my response is always ‘collapse against what?’.
Are you serious!
What about a collapse against gold? That is another story. And one that is much more plausible.
Firstly though, let’s deal with the terminology.
The word ‘collapse’ is problematic.
It suggests a move will happen all of a sudden. To think that the world’s reserve currency will collapse against a bunch of other, similarly flawed currencies defies rationale analysis.
Why would global capital suddenly flee from US capital markets and seek haven in even worse economies like Japan or Europe? Or in a communist dictatorship?
Let’s look at how the US dollar has performed against a basket of other fiat currencies over the past 20 years. Below is a weekly chart of the dollar index, the DXY.
As you can see, the dollar collapsed from early 2002 to early 2008. It was a fall of around 40% in six years.
It also marked one of the greatest speculative episodes in financial history, culminating in the GFC in 2008.
Not surprisingly, the Fed was the culprit. Cutting rates aggressively after the dotcom bust saw punters borrow ‘cheap’ dollars to speculate in just about anything else.
But ever since, the dollar has been in a bull market. 2017 saw a reversal in that trend, but with the emergence of the trade wars with China in early 2018, the US dollar resumed its bull market.
Despite weakness in the dollar over the past month or so, the upward trend is still intact.
So if a collapse in the dollar is coming, no one has told ‘the market’ about it.
But what about gold?
Well, that’s a different story.
While the Fed, the ECB, the Bank of Japan and the People’s Bank of China are pumping huge amounts of currency into their economies, the supply of gold just trudges on, as slow as ever.
If it were just a matter of judging the physical supply of gold against the supply of fiat currency, gold would be $10k plus per ounce by now. But the wonders of the modern financial system have created a lot of ‘paper gold’ too.
Like gold ‘futures’, where speculators gain ‘exposure’ to the gold price, rather than buy physical gold.
So this makes things a bit murkier.
Let’s have a look at the long-term gold price
Anyway, let’s have a look at the long-term gold price. The chart below is a weekly going back nearly 20 years. The upward trend is very strong. The price hasn’t fallen below the 50-week moving average (blue line) since late 2018.
But now the price is a fair way above the 50-week moving average. Unless we’re moving into a genuine bubble situation, I would expect gold to either correct or move sideways for a while.
Aside from the chart set-up, what makes me a little concerned about gold in the short term is its popularity. As today’s Financial Review reports…
‘As stock markets roar back from the coronavirus-led rout, advisers to the world’s wealthy are urging them to hold more gold, questioning the strength of the rally and the long-term impact of global central banks’ cash splurge.
‘Before the COVID-19 pandemic, most private banks recommended their clients hold none or just a tiny amount of gold.
‘Now some are channelling up to 10 per cent of their clients’ portfolios into the yellow metal as the massive central bank stimulus reduces bond yields — making non-yielding gold more attractive — and raises the risk of inflation that would devalue other assets and currencies.’
I can’t argue with that advice. In a world where competitive currency devaluations are standard, of course gold is going to be a long-term winner.
But right now, it is all a little obvious. And betting on the obvious can often hurt you in the short term.
I’d be far more comfortable if gold corrected back to the 50-week moving average, or marked time while the blue line played catch up.
Right now though, I’m a little nervous about gold…