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Tuesday, March 19, 2024



Until recently many analysts just assumed an inverse relationship between Gold and the US Dollar Index.  Until recently, this relationship was fairly well correlated.  Though on the chart above you can see that gold started its recent ascent well in advance of the dollar index drop.  Then continued its asent even as the dollar rose.

Then if this chart continued into 2024 you would see gold go violently  upward even as the dollar moved slightly upward. 

What's going on?

For one thing, the dollar responds positively to an upward thrust of interest rates - regardless of whether this is caused by a strong economy or just casued by high inflation and rising rates.  

Meanwhile, gold responds to the overall economic conditions of the global economy.  

The average US investor thinks that the higher rates in the US is a product, at least in part, of a strong economy.

The central banks of the world, which have been buying gold in vast quantities, think that the higher rates we are seeing are more a product of a stagnating economy laden with massive debt.

In this case, if the global banks are right, the dollar can keep rising even as gold goes parabolic.  (which has not yet happened - but will as stagflation solidifies.)

Yet the dollar has certain headwinds that will become tailwinds for gold

These are:

As rates go up, debt service adds geometrically to the debt.

As debt rises so does inflation.  And as inflation rises gobally, so does destabilizing violent political agitation.  As fascist authoritarion movements gain power, inflation goes parabolic.  At some point this will crush the dollar and all paper currencies and send gold spiraling upwards.

As inflation rises globally the movment towards hot war becomes an inelcutable escape route for political regimes that find themselves reviled for the inflationary environment.  This leads to a temporary relief in the form of ramped up military industry but inevitably leads to greater inflation as supply chains are destroyed.  

Finally, authoritarian government leads to a breakdown in the rule of law that governs innternational corporate cooperation.  This is also very bad for the dollar especially, as it has the current reserve status which would be undermined irreperably by a breakdown in the laws that support  it.

The only beneficiary will be gold.

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