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One Chart, Two Ways to Measure the Dollar’s Decline

by John Rubino on April 26, 2011 · 17 comments

This chart appeared in a recent Business Insider article, and even without explanation it’s a powerful illustration of gold’s bull market. Remember those stomach churning “corrections” of years past? They’re insignificant squiggles when viewed this way. Something to keep in mind during the next 10% dip.

But the dollar’s path (the green line) requires a little thought. It’s clearly down, but doesn’t seem to be falling as consistently and dramatically as gold is rising. Why is that? Because the dollar is being measured against other currencies — which are also falling in real terms — so the destruction of the euro and yen are masking the dollar’s decline. In other words, all the major currencies are being inflated away, with the dollar just slightly ahead of the ugly pack.

Gold, meanwhile, doesn’t “rise” or “fall”. It holds its value while the currencies in which it is valued fluctuate. So this chart actually depicts two ways of measuring the dollar. The green line is versus other currencies, which is a false measurement because it explains nothing about the real trajectory of the dollar. The gold line is the inverse of the dollar’s true value, as measured against the only remaining real form of money. Seen this way, gold’s rocking bull market is actually the dollar’s epic bear market. Neither is likely to end anytime soon.

{ 13 comments… read them below or add one }

terces April 26, 2011 at 7:36 pm

Yes the gold line is going up steady. Your thesis is that the increase in gold is in sync with the decline of the value of the dollar. But gold right now is being driven by a lot of media attention and hype, as is silver. Conversly there is a lot of negative media attention and emotional hype focused on the dollar. When I look at the chart it tells me that the dollar already collapsed in 2008 and is higher since then.

I also believe that the value of the “stimulus” “QE” or however you want to call the increase in money supply is being amply offset in the economy by the collapse in real estate values and trillions of lost wealth therein, and that the dilution of the dollar is much less than the media hype would have you believe.

Your thesis holds for today. Let’s see where it goes when the switch is flipped from euphoria in the stock markets. I am respectful of argument, but leary.

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Dave Ziffer April 27, 2011 at 5:22 am

terces: I would agree with you except that your analysis seems to ignore a significant factor driving investors toward gold: the US debt. At this point the US has borrowed over $45,000 (on average) on behalf of every US citizen. There is no politically imaginable way in which the US could ever, under any circumstances, pay this back. It is far too late to believe that a pullback in “QE” is possible – ever. We have only one likely outcome at this point, and that is to print so much money that $45,000 will represent so little purchasing power that the average American could actually afford to pay it. My guess is that a factor of 10 would not be enough. Actually a factor of 20 would be more like it. So we are going to have to get to a point where a single gallon of gas costs $80 in order to rip off our creditors to the extent where we can technically repay our debt.

Are we in deep trouble? Amazingly the federal government and the federal reserve publish resources online that allow us to easily conclude so. For example from this Federal Reserve web page (http://research.stlouisfed.org/fred2/categories/32218) you can build your own Treasury maturity distribution graph like this one (http://research.stlouisfed.org/fred2/graph/?id=TREAS10Y,TREAS5T10,TREAS1T5,TREAS1590,TREAS911Y). It shows us trending radically toward a future in which over half our debt matures in under 5 years and the other half matures between 5 and 10. Our debt is becoming increasingly short-term and we ourselves are buying most of it with manufactured QE money. The reason: the rest of the world is gradually coming to understand that the only way they can ever cash in their Treasurys is to either find a greater fool (these are in increasingly short supply) or get paid back a small fraction of the original purchasing power.

Gold and silver together constitute maybe 1% of the world’s total invested capital. At today’s prices all the gold on earth is valued at about $5 trillion whereas the bond market alone is valued at about $85 trillion. If a mere 1% of the world’s bond holders were to become nervous about their payback prospects and switch to gold, they would drive its price up by 16%. Given that bonds can only become more dangerous as time passes, and that governments can only print more money more intensely as time passes, I see little potential for a long-term reversal in the fortunes of precious metals holders.

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riley May 12, 2011 at 7:07 pm

If you surveyed people owning gold/silver in a large general audience – say a baseball game, I believe you find less people owning gold/silver than you’d expect. There no mania – YET – that will come near the end of the bull market -which we are nowhere near….

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DavidN April 26, 2011 at 9:34 pm

That’s an even faster rise for gold than it first looks. The left side looks like a log scale. The rise isn’t linear, it’s almost parabolic.

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econ crash April 26, 2011 at 10:55 pm

That’s a very interesting chart and confirms the unstable nature of fiat currencies compared to real money, gold.

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Bruce C. April 27, 2011 at 12:29 am

I love it! I watched a bit of the Kudlow Report today (4/26) and some perma-bull said essentially, ‘All I know is that the dollar is higher than it was in 2008, so the trend is up.’

Because the DYX is a house of mirrors, I’d like to focus on the gold/USdollar graph. (Actually, I don’t like to focus on it, because it makes me feel stupid. I didn’t really ‘get it’ until 2008.) It shows how much people have been freely willing to pay for 1 Troy ounce of “the barbarous relic” (plus commissions) for the last ten years. As far as I’m concerned, whoever started buying it in 2000 are the ones who have the clearest understanding, or at least have for the longest time.

One comment about the DYX: Isn’t it interesting that when the Fed absorbs crap (e.g., mortgage-backed securities in ’09 and Treasury bonds in late ’10-’11) that it tanks?

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paper is poverty April 27, 2011 at 4:09 am

I actually think both lines in the chart overstate the value of the dollar. I’m sure it’s true that gold maintains roughly the same value over broad time periods, but that doesn’t mean it’s not undervalued during short periods, like right now. I can think of three reasons why gold is undervalued:

First, the percentage of financial assets which are currently invested in gold and gold miners is very small by historical standards. As this percentage rises toward historical norms, gold will go up not only nominally against the dollar, but in real terms, due to rising demand. (Think Texas pension fund.)

Secondly, there’s the idea that a lot of people who think they own gold do not own it at all, but merely own paper. GLD isn’t fully backed, and unallocated accounts have fractional reserves. Even central banks don’t have the gold they claim to have because they’ve loaned it out, and it’s been sold. It’s illusory supply. (You could also add counterfeiting of gold and silver mining shares via naked short selling to this “illusory supply” story.) But by the time the global economic disaster has finally run its course, people won’t have any tolerance left for counterparty risk. They’ll want real metals they can hold in their hand, and they won’t be misdirected into paper substitutes. That means that the apparent supply of gold will actually shrink globally. It’s often stated that gold supply is stable and slightly growing, because unlike silver we don’t use it up. But as far as I can see, its *apparent* supply can and will shrink.

Third, a few weeks back Chris Martenson interviewed Paul Tustain about gold, and Tustain said that the fair price for gold if you factor in a 5% chance of hyperinflation over the next 15 years is around $3800. The only way to get the value down to where it is today, using his model, is to assign the risk of hyperinflation to zero. Clearly the risk is > 0, so by this analysis, the gold price is not fully reflecting currency risks.

If those are valid points, and if you see the dollar as the inverse of the gold price, then that dollar value is currently overstated. Maybe grossly overstated. The dollar is a lot weaker than it looks, even when you’re using gold to measure it.

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Brad Thrasher April 27, 2011 at 10:50 am

That’s refreshing JR. It would be interesting to chart the Fed’s overnight rate against gold and the USD over the same period. The broad, heck massive swings in the USD are impressive.

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pslater April 27, 2011 at 3:27 pm

I believe one of the clearest ways to look at gold’s ‘value’ is through the US balance sheet. If you look at the US (govt, corporate, and individual) balance sheet over the last several years, you will see that the asset side of the balance sheet has been decimated while the liabilities side of the balance sheet hasn’t budged. This has created a situation where the remaining assets are no longer able to generate enough income to service the liabilities. The Fed’s money printing, purchasing of mortgages and Treasuries in the open market, and accounting shenanigans (mark to myth for the big banks) are a feeble attempt to maintain the status quo (generate income) for their stock holders (the same big banks).

Ultimately, there will not be a meaningful economic recovery until the liabilities are written down to match the assets. This will require the banks to realize the losses they so richly deserve.

In an utlimate ‘Catch 22′, if the Fed allows this to happen the US banking system (indeed the global banking system) will prove to be insolvent. If the Fed raises interest rates in an attempt to rescue the dollar, the carrying costs of the massive US debt burden will skyrocket and cripple any economic recovery.

As long as this balance sheet mis-match is allowed to persist, PM’s will trend higher. After all, how far could currencies decline? The answer is potentially to zero.

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Brian April 28, 2011 at 8:48 pm

I loved this article and agree. The one factor that always has me second guessing the facts is this: the strength of the dollar is directly related to peoples faith in it’s purchasing power, since the dollar is backed by nothing but faith. I feel that as long as Americans believe the dollar is valuable, they will continue to work for it, and spend it for their needs, ignoring other currencies along the way. All based upon perception. That is ofcourse until the economic realities end up on their doorstep……then they seek the root cause of their decreasing living conditions, which will lead them to the reality declining dollar. Because this “reality” is happening all at the same time, the “faith” in the dollar wll plummet exponentially….a virtual run on the banks. Gold’s value has nothing to do with the dollar……just because it is “priced” in dollars tell us nothing about it’s real value, there is simply to much disinformation for the markets to sift through to get an accurate picture of Gold’s value, so as an investor, it’s nearly impossible to predict it’s future price, simply because we cannot predict the public’s response to disinformation in the future. Our currency is pegged to perception….and Americans have a flawed perspective. One thing i’m sure of, however, gold and silver are undervalued when calculated by people whose perspective of our future is clear.

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Arctic Guy April 29, 2011 at 7:11 am

This site needs USD Index charts, daily, weekly, monthly, yearly etc. This info would better reflect the website’s name.

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penobscotman April 29, 2011 at 11:23 pm

Chart measures weatlh in dollars, wether you factor gold or otherwise! When the collapse comes your needs will be to feed your family! You will then see a transition from wealth in dollars to wealth in food. The Govt will enact land reform to feed its citizens…Ag land with govt control will be an interim basis for wealth for quite some time. Eat your gold and dollars!

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JOM August 20, 2013 at 8:48 pm

Well, I heard that the Chinese bank have been meeting with the White House and they want equity i.e. Land. So you better have some type of year of the dragon silver to trade with them for access to the food that the US gov will be so happy to give in return for asylum in government buildings.

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