Lear Capital: Strong Dollar Strong Gold?

Of late, it seems the dollar can do no wrong.  Despite weak housing and jobs data and a confession that the U.S. economy is not doing so well, the dollar is emerging as a currency champion.  Bonds are soaring and yields are plummeting as Europe's turmoil has citizens fleeing their own currency in exchange for safety in the dollar. Or - are they?

According to the World Gold Council, the flight to safety has more than one destination.  In Q1 2012, the dollar value of gold purchased, increased by 16% year on year.  Central bank purchases, Chinese demand and steady ETF demand from individual investors, accounted for much of the increase.  Now, if those who can print money are buying gold, shouldn't that deserve some attention?

Meanwhile, Fed holdings of Treasuries has soared, further perpetuating the illusion of a strong dollar.  Hence record high bond prices and record low yields.  On January 28, 2009, the Fed reportedly held just $302 billion in U.S. Treasuries.  By the end of Q4 2011, that amount, according to a recent Forbes article, swelled to an astonishing $1.75 trillion.  So let me ask, how strong would the dollar look today had the Fed not stepped up to buy an extra $1.4 trillion of Treasuries in this 2-year period?

Gold answers this question.  In December of 2009 the dollar index reached a high of 78.44.  The dollar index is a measure of the dollar's value against a basket of global currencies.  Today, the dollar index traded as high as 82.73.  Now, if the dollar truly was as strong as many believe, then it should also be true that the gold price is lower today than it was at the close of 2009.

At December 31, 2009 the gold price was $1100 an ounce.  At the time of this writing gold is $1615 an ounce.  The dollar is stronger and gold is up 46%.  For those who ask how and why, consider this.  Global money printing is driving the gold price.  While the value of a currency at any given moment, is generally measured against the value of another currency, or a basket of currencies, the value of gold is measured against all currencies.

As central banks take turns printing money, the European Central Bank is the last to print money for a Spanish bailout.  Hence, a temporarily strong dollar.  But make no mistake, efforts to boost global liquidity are taking place everywhere.  Borrowing standards are being lowered along with interest rates as well as outright creation of OTA (Out Of Thin Air) money.  All paper money is in a race to the bottom.

In fact, it is the desire of central banks to keep their respective currency values as low as possible.  The weaker the currency, the easier is to repay debt and the more profitable exports become.  Today's reported drop in retail sales bears this out.  That said, one can reasonably expect our own Fed to now follow suit.  The stage is set.  We have relative dollar strength and a faltering economy.  There really is nothing standing in the way of another round of money injection.

If you are one currently avoiding gold because the dollar is strong, know this.  Look at the numbers - numbers never lie.  Global money printing is to gold what spinach was to Popeye.