Gold And FRN$ Correlation

Posted 10 Dec 2009

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.