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Gold And FRN$ Correlation

by Casey Research on December 10, 2009 · 8 comments

Reading time: 3 – 5 minutes

The FRN$ has been the world’s reserve currency for decades.  As a result, the breadth and depth of the capital markets add tremendous liquidity to the fiat currency illusion.

This is one of the reasons the FRN$ is near the bottom of the liquidity pyramid and rises in value with each round of the credit contraction. But as continuing pressure keeps being added to the FRN$ through bailouts, inflation, swaps, etc. it will hasten towards the fiat currency graveyard as commodity currency alternatives gain prominence.

The secular gold bull market has entered stage two and continues pulling in capital.  This has led to a large multiple of the gains inverse to the FRN$ decline.  But more importantly and more often gold and the FRN$ are strengthening together.  This is because of their respective positions in the liquidity pyramid.

So as the FRN$ continues its evaporation the Ancient Metal of Kings will do what it has always done; preserve capital.  As it has performed this function over the last eight years it has also increased in purchasing power.  As gold enters the third stage of the bull market, which is still likely several years away, it will strengthen even more often while the FRN$ both advances and declines.


Jeff Clark, Editor, Casey’s Gold & Resource Report

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

And keep up on the gold and precious metals markets in Casey’s Gold and Resource Report. Each month I’ll bring you the best research and investment recommendations in the business. And until December 18, you can get a subscription for 50% off the regular price and receive a free gift worth $79. Click here to learn more.

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ABOUT THE AUTHOR: Casey Research has been making money for subscribers for 30 years. We do it by spotting trends in a market or the economy early — way ahead of the crowd. The Casey Research staff includes geologists, economists, seasoned business analysts, and experts in precious metals, energy, technology, and natural resources. This is merely one article of 7 by .
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{ 8 comments… read them below or add one }

1 Smart Dude December 10, 2009 at 10:22 pm

Yes, I concure with you and I read Doug Casey’s and GATA and a few others as well. I would be of interest to get folks to start using gold and silver in purchases. This week an individual was selling his camp trailer for 5,000 $FRN and told me he would take three 1 oz gold buillon coins and one roll of 1 oz silver. At present value he would be taking $4,100 in real money in lue of 5,000 FRN. He understands that but prefers the coin. Last year I gave up $100 face gen circ mercery dimes for a rifle. And not to think that I am simply getting rid of coin, when I turned 59 1/2 in January of this year I emptied out my IRA and used every single FRN to purchase gold and silver coin and I feel much better and safer for it. Don’t use my real name if you quote me for any reason, but the point is to start using gold and silver coin again instead of fiat currancy. Having a place where folks could list under alias of course their purchases whether they be buyers or sellers using coin might stir interest in folks returning to what is right. Just a thought. My regards and keep on keeping on.

[Editors note: Personal information changed as requested by commenter.[

2 Amish Rake Fighter December 11, 2009 at 12:58 am

Smart dude, check this out, it’s the “Ag Trading Post” grand opening this Saturday just north of Dallas.


3 Roger H. December 12, 2009 at 1:12 pm

Hella Trace,
I hope you are enjoying the Andes, but am thankful you are still working. I am going to send you an e-mail video that you may have not seen. It’s a great short condensation of the history of the U.S. economic destruction by the Fed guys. This video was made available by a group of American ex-patriots in South America. Also, this is the same group that have promoted the Cancer Video that I e-mailed to you. I have been studying the cancer info for almost 40 years and it is caused not by what you “get” but by what you “don’t” get. It is a DFICIENCY disease! And this next truth will be harder to grasp, so is arteriosclerosis!. Wow! This crazy Doc from Milwaukee is really nuts! But, it’s ALL true! Usually at this point of the conversation the listener closes down and doesn’t hear anything else. So be it, I tried. Enjoy your trip and God Bless.
Roger H.

4 Trace Mayer, J.D. December 12, 2009 at 11:27 pm

Thanks Roger. Healthy people do not contribute much to the top line for the sickness industry.

5 Jim Lorenz December 13, 2009 at 12:44 pm

An excellent approach to understanding the monstrous Federal Reserve system, unconstitutional powers plus fractional reserve banking.
I did find a few thin spots which I hope will be quickly corrected as I have recommended this e-book to many of my libertarian friends.
Errata? The Great Credt Contraction

P.37:The text reads, “If A exchanged the pizza with B for a silver certificate, then the transaction would not be settled but not extinguished until…”
Shouldn’t it read? “If A exchanged the pizza with B for a silver certificate, then the transaction would be settled but not extinguished until…”

P. 69, text reads: “In 1971, people were too gullible and accepted the thinking that the earth (FRN$) revolves around the sun (gold).”
Shouldn’t it read? “In 1971, people were too gullible and accepted the thinking that the sun (gold) revolves around the earth (FRN$).”

6 Trace Mayer, J.D. December 13, 2009 at 10:33 pm

Thanks Jim. Those typos are so sneaky. I think one even got into a chart. How rude!

7 strainer December 21, 2009 at 1:50 pm

I actually just read a summary and path to a very interesting bearish view on gold from Woodbridge Capital, a hedge fund run by two former Soros guys: [URL edited because it did not source the referenced topic]

While I am personally still bullish on the gold price and gold mining stocks, I think it is always a good idea to consider the opposing viewpoint when it is provided by a credible source, as is the case here.

8 Trace Mayer, J.D. December 21, 2009 at 7:05 pm

I could not find the article you referenced. There is always a potential downside but I doubt supply with peak gold will be able to match demand considering the quantitative easing. There is some downside here probably to the $1050-1080 area but then it should be off and running towards $1300 for Q2 2010 like I called on BNN.

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