Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Bugs Army - Dollar Indices Pricing Research Rubbish?

Commodities / Gold and Silver 2013 May 23, 2013 - 05:31 PM GMT

By: Ned_W_Schmidt

Commodities

Investors rely on indices to help understand how a market is moving, and perhaps even how it might move in the future. Technical analysis of a market, for example, is only possible due to market indices. How else would we assess what might be happening in a market? If an index is not properly constructed, that whole effort may prove fruitless.


Indices must adapt and change to accommodate the economic evolution that takes place in the market. The Dow Jones Industrial Average bears no resemblance to the first Dow average which was created more than 100 years ago. Due to the inadequacies inherent to the mathematics of that average, market weighted indices were created. The well-known S&P 500 being the best example.

The first step in using any index is a review of the construction of the index. What is included in the index is obviously important. Equally important, and perhaps a more serious concern, is what is excluded from the index. Investors should be aware that the name of the index may or may not accurately reflect what it is the index measures. A cursory review of many indices will find that few adequately measure the market with which they are associated by their names.

As we are interested in Gold, the comments which follow relate to a popular dollar index. Note that we have not chosen this index for a vindictive reason. Rather, it was chosen due to popularity and ease of understanding. The comments that follow are generally applicable to other dollar indices. In short, nearly all dollar indices are inadequately constructed and are therefore of little analytical value. Due to inadequacies in their construction they likely tell us little or nothing about the future for Gold.

An index to be useful should have two characteristics: depth and timeliness. It should be sufficiently broad as to create a reasonable approximation of what a market might be doing. It should evolve over time to include changes taking place in the market. Of the 30 stocks in the Dow Jones Industrial Average, for example, only 6 have been in that average for more than 40 years.

A popular dollar index is the USDX produced by ICE. Per the web site of that exchange,

“The USDX is quite unique among currency indices in its fixed composition. It has changed once since its 1973 introduction, and that was when the euro was launched in January 1999, replacing a number of European currencies. The net representation of the European legacy currencies in the USDX remained fixed at 57.6%.” (theice.com, 20 May 2013)

Rarely do we read of market research that brags about having not changed or adapted its methodology in 40 years. In short, this index assumes that the global economic system is today as it was 40 years. On this basis any such index fails to meet an important criterion, timeliness. The only change that occurred in this index was forced upon it when the Euro replaced the former European currencies.

Chart to the right comes from the ICE web site. In it are listed the currencies that compose this index. Note per the above that the composition has not changed in 40 years.

While the British Pound, Swedish krona, and Swiss franc are indeed unique currencies issued by sovereign governments, the economies of those nations are not independent of the European economy. In reality, 77.3% of the value of this index is determined by Europe. That is hardly a representative sample of the world’s economy today. And we must ask, when was the last time you used Swedish krona?

What is not included in, or excluded from, an index is equally important. All of the currencies of Latin America are excluded. With the exception of the Japanese yen, all Asian currencies are excluded. Where are India and Russia? Africa does not exist per most of these indices.

Perhaps the most shocking exclusion from dollar indices is the Chinese Renminbi. China surpassed the U.S. to become the largest global trading nation, imports plus exports, in 2012.(bloomberg.com, 9 February) But yet, this dollar index has 77% exposure to the European economy, and zero(0%) to the Chinese economy. Some justification should be available for such a questionable design feature.

Second chart on this page portrays the dollar value of the Chinese Renminbi over the past 2+ years. The readily apparent appreciation of the Renminbi, depreciation of the U.S. dollar, has been excluded from most dollar indices. That exclusion of the Chinese Renminbi suggests that the such indices may not have adequately portrayed the value of the dollar in recent times.

That reality leads to some questions. How long can these researchers ignore the Chinese economy? What justification exists to exclude the currency of what is becoming the most important economy in the world? How can researchers use indices with such deficiencies to predict the future price of Gold?

Based on the inclusions and exclusions in dollar indices we would have to question their usefulness. Any claim that these indices reflect a reasonable measure of the value of the dollar would seem to be difficult to defend. More serious is that research using these dollar indices to infer the potential for Gold or Silver may be questionable as well as fallacious. Serious issues exist with such research that should make any investor dubious of using conclusions on Gold based on dollar indices

By Ned W Schmidt CFA, CEBS

Copyright © 2013 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to www.valueviewgoldreport.com

Ned W Schmidt Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in