The Gold Chart You Need To See

When you first learned about investing one of the things you learned was that gold goes up when inflation goes up because gold is immutable money and if paper money falls gold rises in the debased paper money.

It is investment 101.

The trouble is, inflation has been flat in the past and gold has gone up a lot, but now inflation is alight, gold is going nowhere except down.

Here is the chart:

So what gives?

I had been scratching my head too, but something gave the game away that suddenly explained everything. While gold was falling, my exchange-traded fund position was making me money. How come? I’m denominated in British pounds. So while I was hurting in dollars I was smiling in the currency I consider my wealth is measured in. I could buy more warm beer even if I could buy less Budweiser with my gold.

Gold had gone up in British Sterling.

Now we have all read for years how the dollar is going to die. How the dollar is doomed by debasement. How it will lose its primacy to the yuan, euro, to crazy UN money and of course bitcoin. Well the dollar has been ripping it up on the world currency stage, crushing all before it.

This is of course down to the Federal Reserve and its quantitative tightening (QT).

So the story goes like this: Inflation up, interest rates up, QT coming, dollar up. Why would you bother with gold when the currency itself is on a rampage? Gold is this stodgy thing, mainly mined in foreign currency somewhere, yet denominated in dollars. Gold hasn’t gone down, the dollar has gone up.

So inflation up, dollar up, gold (at least for now) down.

Don’t believe me? Well take a look at September 13, 2022’s gold action when the inflation numbers came in hot:

Down goes gold because the market sees interest rates up, dollar up, and thus gold down.

Recall, bad news is good news. But, bad news can be bad news. At some point the situation flips.

Will it flip on inflation/strong dollar? It might not have to.

The dollar is strong enough and last week the market signaled that enough dollar strength was enough.

The U.S. cannot allow a runaway dollar because while that will kill inflation fast, it will also kill the economy. As I have written here a few times, low inflation is likely not wished for just yet as deficits need eroding. If I’m right this reaction will be short lived and you’ll be told “bad news is good.” Then in due course “good news will be bad” and even soon enough, “good news will be good.”

If inflation is not going to crest about now, or if the dollar high is going to be here and about, then gold is going to rock upwards.

You don’t have to be a genius to follow whether gold is going to rally or die because it’s pretty clear in the chart:

It’s going to make the W or bust. I admit I own a lot of gold exposure, so you can guess my conclusion.