Will Gold Win Out Against The US Dollar?

It is an essential impossibility to solve problems created by excess debt and artificial liquidity with more of the same. That’s our credo here at Casey Research, and the reason why we believe the gold price will turn around and not only go higher, but much, much higher.

While fellow investors around the world may not agree with gold-loving contrarians like us, they are buyers: gold is up in euros and almost everything else, except the dollar.

The dollar’s rise has been strong and seems all but unstoppable. But look at it in big-picture terms, as in the chart below, and ask yourself how sustainable the situation is.

I’m skeptical of reading too much into such charts. A peak like the one in the early 1980s would certainly take the USD much higher, and for several years to come. But still, this is an aberration. It’s not the new normal, but rather the new abnormal.

More to the point, gold hasn’t collapsed since the dollar began its latest surge last July. Just look at this one-year chart of gold vs. the US dollar. The dollar is up sharply (in EUR, as a proxy for everything-not-the-dollar and for comparability to the chart below), but gold is only moderately down.

Gold has been trading almost sideways over the last year.

That might seem like damnation by faint praise, but it’s critically important. With the USD skyrocketing and commodities plummeting, gold should be dropping like—well, like a gold balloon—if the critics are right and it has no practical value at all, except to dentists and fashion accessory designers.

But gold is money, the best store of wealth millennia of human experience have devised, and more and more people are recognizing this.

Consider this chart of gold vs. the euro, which documents my contention that people outside the US do not see gold as a barbarous relic, but as an essential holding to safeguard their future.

Pretty much everywhere but in the US, gold is up, not down.

This chart supports my view that gold rebounded last November when it breached its 2013 low because international buyers saw that as an opportunity. The US has gone from primarily exporting inflation to exporting gold and inflation.

The fact that the dollar has risen faster than gold has dropped has important, positive effects on miners operating outside the US. If costs are paid in Canadian dollars, Mexican pesos, euros, or really hard-hit currencies like the Brazilian real, then those costs have just gone way down relative to the price of gold.

Of course, there’s a good chance that there’ll be more sell-offs before the gold bull resumes its charge… but they should be regarded as opportunities. Because once the gold market rises again, the best small-cap mining stocks have the potential to go vertical.

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