Investors who buy gold for the long-term look at a number of factors that may or may not be of importance over the short-term to the price of the precious metal. For example, the strength of the U.S. dollar will either make gold more expensive when it is strong or provide special buying opportunities when the dollar is weak relative to other currencies.
The Dollar and Gold: An Inverse Relationship
There is a simple explanation for this inverse relationship. Since the removal of the gold standard as a factor in pricing of paper currency, the market responds to the relative trade-weighted value of each asset. In other words, when the dollar is strong and perceived to have high purchasing power, gold prices are under pressure. It works the opposite way when the dollar is weak in international markets; gold tends to be strong.
Over any given business cycle, the benchmark that is the price of the dollar fluctuates constantly, and traders track this movement closely because these micro-movements are important to short-term trades and profits.
A Bleak Future for the U.S. Dollar
If short-term investing in the dollar is your goal, you’re probably focused on generating immediate profits or averaging down the price of gold in your portfolio. However, those who buy gold for the long-term are interested in the dollar’s movement on a different, and much bigger, scale.
The bigger picture to consider is the future purchasing power of the dollar in absolute terms. The simple economic fact accepted by educated investors in gold is that today’s dollar has and always will have lower value in the future due to a number of factors.
Just a few of the reasons for this prediction include:
- Massive deficit spending at unsustainable levels
- Accumulated national debt that exceeds an incomprehensible $20 trillion
- Global efforts (especially by China) to prop up other national currencies and weaken the U.S. dollar
- Ongoing, persistent and cumulative annual inflation
- The potential for significantly higher inflation
Inflation Looming on the Horizon
One does not have to be a doomsayer to understand that the simple impact of cumulative inflation, just one of the factors above, guarantees a loss in the value, or purchasing power, of paper currency.
On the other hand, those who buy gold for long-term protection of their portfolio’s purchasing power understand the impact of inflation on gold. As opposed to eating away at the value of the asset held, gold has throughout history been one of the best possible protections against inflation. In addition to its role as a preferred safe haven investment in times of economic turmoil, gold is seen by many experienced investors and traders as the wise alternative to paper currency over the long-term.
Trump, World Economies, and the Dollar
The election of Donald Trump, forecasted to be a market catastrophe if it came about, is already impacting the markets. After a very brief knee-jerk reaction, the markets are now seeing potential for light at the end of this long, dark economic tunnel the world has been in for nearly a decade.
This optimism is shoring up the U.S. dollar as the beneficiary of a supposed rejuvenated national economy. Boris Mikanikrezai, a notable Metal Bulletin analyst, notes the short-term impact on the precious metals markets. He states, “Because we think the strength in equities induced by Donald Trump’s victory in the U.S. presidential election is likely to continue for longer, we would not be surprised by a strong sell-off across the board this week.” 1
The Silver Lining: Easy Entry to the Gold Market
However, long-term buyers of gold understand this can only be a short-term correction in light of the persistent worldwide pressures that still exist. With assurance of a future decline in the value of the dollar, the only question is how much it will drop. Seen in that light, the current decline in gold prices is seen not with alarm but rather as a very significant gold buying opportunity. 2
Additional Sources
2 – http://www.reuters.com/article/global-precious-idUSL4N1DI3B5