Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Monday, May 12, 2014

Possible future scenarios for gold x USDX index

Last time I suggested that the completion of an inverted head-and-shoulders pattern in the goldxUSDX index plot pointed to a target near 1300. What could this mean for the gold price? Or the US dollar for that matter?

The current value of this index is $1295 x 0.799, which is about 1035. So we are really talking about nearly a 30% gain. However, the pattern has so far taken a year to trace out, and is just (hopefully) tracing out the bottom of the right shoulder. So this gain is not going to happen in a week (sorry!)

The easiest approach is for both gold and the US dollar to rise in tandem. Unpossible, you say? That's what we had during the first five months of 2010 (yellow arrow below), which I recall were pretty good times for gold miners.

The blue hyperbolae in the figure above are the isoquants I introduced here. Isoquants are lines in which the product of the gold price and the USDX index are a constant. If we are to reach the 1300 level, what are some possible scenarios?

If the US dollar rises to 90 on the index, a gold price of over $1400 per oz is needed to bring the product to 1300. If the dollar only rises to 85, then the gold price would have to rise to $1529 per ounce. If the dollar were to fall to 70, then gold would have to exceed $1800. I actually view the last scenario as being unfavourable to gold miners, as history shows that rising gold prices are likely to be met by windfall taxes.

I think that the economic situation that would favour both increasing gold price and increasing dollar price would involve a meltdown in stock markets, causing another rush to safety, as in 2008. Unlike 2008, however, there is not a lot of speculative froth in gold, so I think in the event that we have another financial crisis, gold will do a better job as a disaster hedge.

Speaking of disaster hedging, I am still running with the thesis that when our gold-silver ratio in phase space plot reaches point D, we will enter the next crisis which will lead to another sharp run-up in the gold-silver ratio. We are pretty close to it now. 

1 comment:

  1. Gold goes down in liquidity crises nowadays, see 2008.

    USD can rise from here on if we're starting a secular bear market for EMs, right? Certainly in the case of a secular bear, money would flow out of EM equities and debt, and into safe-havens, 2 of which are gold and USD.