Gold and the U.S. Dollar

My Blog Comments are based on math models I have developed myself, so I can easily explain why I have been a bull on both gold and the U.S. dollar in recent weeks. My models indicated that they would rise together, and I record what the models forecast.

Of course it's happening, but it doesn't make much sense to Wall Street financial analysts. I was an analyst specializing in mining for many years, and when I put on my analyst's hat, it makes no sense to me either. Like most commodities, gold is traded in U.S. dollars, and its trading pattern is normally a mirror image of the value of the dollar.

Until today, there was no adequate explanation for gold and the dollar rising in price at the same time. Today, a CNBC commentator opined that Russia has stopped selling palladium, and because Russia is an important source of the metal, the price of palladium is soaring (described as a geometric progression on the upside). The price of platinum is sharply higher as well.

In my experience, gold has always been a poor cousin to platinum and palladium in pricing terms. When P and P roar, gold should go along for the ride. So the dollar is recovering in step with U.S. economic recovery, and gold is in a bit of a speculative frenzy unrelated to dollar activity for the moment.

The dollar recovery is real. If the Russian palladium story turns out to be accurate, the gold price surge could go along with palladium for weeks, months, or years, but it will end with a thud the day that Russian officials bring their palladium back to the market.

It takes me back many years to the silver bubble that was widely attributed to a single trading group (the Hunts) that cornered the market for a time. Speculators made millions, and many of these same people ultimately lost everything.

I see good news and bad news in this story. The good news is that the U.S. dollar is recovering from an extremely depressed level, so much so that gold producers will prosper for some time whether or not the price of the metal goes into a speculative frenzy (to reflect its close association with palladium). If gold does soar in the shadow of palladium, gold shares will fly too. That's the good news.

The bad news is that there is no way to call the final day of a speculative frenzy, especially when it is totally dependant on decisions made by one person or a small group representing a country or a single brokerage firm. Fundamental analysis is useless, and math models are designed for use with widely traded securities. Conventional technical analysis might help, but without additional tools it will be a difficult call.

I believe that until recently, the price of gold has provided a reasonable reflection of the value of the dollar. Underlying long term price momentum has remained strong throughout. There is no need for a speculative gold price frenzy to justify a positive stance on gold and gold stocks at this time. Having said this, one of two scenarios could possibly emerge from here - -- either the palladium price will collapse, or the price of gold will soar. Stay tuned.