Gold and the Dollar: Putting the Relative Cart before the Relative Horse

Source: Seeking Alpha, Otto Rock (8/18/08)

...To me and my fundamental mindset, this current US dollar move puts the cart before the horse. You see, the base of all this is the country's economy. A strong economy is the horse, and its currency is the cart. If the economy is strong, this will be reflected in its currency...Otto Rock

I'm not a goldbug. Way back on April 16th I wrote as part of this post, "Give me a fundamentally sound reason to buy the dollar, and I will." I don't belong to the world of kneejerk hatred of fiat currencies, conspiracy theories and suchlike. For one thing, there's a big difference between the utopian world of the perfectly smooth capital market (doesn't exist) and the wholesale manipulation paranoia promoted by GATA and company. For me, being dollar bull/dollar bear is all about the macrofundies, and up to now the structural weaknesses in the dollar have precluded me from buying into the currency. At the same time gold has seemed to me a far better alternative as a means of capital preservation...

The question I've been mulling over this morning is "Is the current USD move from approx. USD 72 to approx. USD 77 backed up by the sound fundamentals I need?" (and if you're wondering, YES, this is the type of baloney a financial wonk thinks about while laying in bed late on a Sunday morning...sad, ain't it?).

Here's what I think: The dollar's move has been backed up by China's central bank buying into US treasuries in a direct way (i.e. via the New York Fed deposits mentioned in this post and looked at in far greater detail by the excellent Brad Setser in his blog). The $29bn noted by Setser is a very large chunk of change, and by pumping it straight into treasuries the US gov't has successfully rallied the dollar. Once the ball gets rolling, more money jumps on and the rally snowballs. Here we are today. But is it a fundamentally sound position?

To me and my fundamental mindset, this current US dollar move puts the cart before the horse. You see, the base of all this is the country's economy. A strong economy is the horse, and its currency is the cart. If the economy is strong, this will be reflected in its currency...

The current Chinese "quiet bailout" is only a temporary measure. Once it stops the real structural weakness of the US economy and therefore its currency will show through again, and the USD will drop...

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Source: Streetwise Reports (07/13/2020)

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"China's export quota could be opportunity for Canadian miners"

Mexico: Gold's Next Powerhouse Player
Source: Marc Davis, BNW News (11/03/2009)

As the world's key gold producing nations struggle mostly in vain to replenish dwindling below-ground supplies, Mexico is bucking the trend in a big way.

Where Have All the Gold Mines Gone?
Source: Brent Cook, Exploration Insights (04/14/2009)

Given the declining global gold production, mining companies’ demand for reserve replacement and the acute dearth of new gold discoveries, there is no doubt that real economic discoveries will be exceptionally valuable. . .the opportunity for stellar profits is the best it has probably ever been. Identifying the few successes, however, will require vigilant and constant technical assessment of geology and drill results, always with an eye to mine economics.

Congo Completes Mining Review, Says Majors Quit Talks
Source: Reuters (12/20/2008)

"Review process is extended an additional 45 days to allow six companies to return to the negotiating table for direct talks with government ministers."