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Gold Price Out of Synch With US Dollar Index, Expect Sharp Decline

Commodities / Gold & Silver Feb 13, 2008 - 03:10 AM GMT

By: Ned_W_Schmidt

Commodities Best Financial Markets Analysis ArticleBy the time you read this, more than enough words will have been expended on the possible sale of Gold by the IMF. Therefore, my comments on the matter will be brief. A group of economists at the IMF want to sell Gold to buy debt paper in order to earn interest income to pay the salaries of a bunch of economists asleep at their desks. Such is not the kind of thinking that makes market tops. Sounds more the thinking that went into the Bank of England sales in 1999.


This week's chart is of the Schmidt Median Dollar Price Index, left axis, versus the Gold price of a U.S. dollar, right axis. This index of the US$'s value is superior in construction to the popular dollar index, which is mistakenly trade weighted, for understanding the underlying trend of the US$'s value on foreign exchange markets. The Gold price of the dollar is equal to one divided by the US$ value of Gold. It is is how many ounces of Gold are required to buy one U.S.$. When US$ price of Gold rises, this measure declines.

As is readily observable, these two measures run together much of the time. When they are out of sync, one of them is likely to correct that divergence. Usually Gold does the correcting, but it could be either way. As the index indicates, the true value of the dollar versus other national monies has not been declining. A change in sentiment on the dollar, short-term, is developing. After the sharp decline that had been experienced, such a change in thinking is not unusual. The Gold price of US$ is too low, and should rise to close part of that gap. That means the US$ value of Gold should decline. Gold investors should be building cash in order to buy on any price corrections.

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. For a subscription go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html

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