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Gold Loves Me, Gold Loves Me Not

Written by Luke Burgess
Posted December 21, 2020

Christmas Update: It's Round 1 and we're already seeing some great action in the ring tonight, ladies and gentlemen. My father and uncle have immediately launched into politics. My dad threw a mean right “libtard” followed up by several hard-hitting “beta-cuck soyboys” — to which my uncle responded something about the Nazis and China. Feeling a bit of pressure, my aunt was tag teamed in and used one of her special attacks (up, down, left, A button), scorching the battlefield with an N-bomb. And that's just where things really started to get ugly. The dogs are barking and the children are screaming. It's gonna be a wild show tonight, folks. Stay tuned as we cover the action live.

In the billions of political arguments and debates that have occurred throughout the entire history of mankind, how many of them do you think resulted in one person changing their mind? What percent ended with one person changing their mind to agree with the other?

0.000000...

How many zeros do I add before a one? I would really like to know.

I'm honestly not so sure it has ever happened.

The Population Reference Bureau estimates that over 108 billion people have ever lived. And I'd bet 108 billion of them never changed their mind after arguing.

But it makes sense. Because the fact is you really can't change people's minds. People can only change their own minds. The best you can do is try to influence the path they take to reach their own conclusion. So arguing any point, at best, only serves to influence.

A great example of this is seen in the relationship between the U.S. dollar and gold. Prior to the end of the Bretton Woods system, the price of gold was fixed to the U.S. dollar under what is colloquially known as the “gold standard.”

Under the Bretton Woods system, the United States was limited to how many dollars it could create by its gold holdings. But that all ended in the 1970s.

Today, the U.S. dollar and gold have been officially decoupled for nearly five decades — August 15, 2021, will actually be 50 years to the day that Nixon announced the end of the gold standard.

Despite the five decades that have passed, however, gold and the U.S. dollar are still perceived as always having an inverse relationship. That is, when the value of one goes up, the value of the other goes down.

But that's only kind of true.

The relationship between the USD and gold is... well... complicated. And it's complicated for a number of reasons.

First, the public market's perception of the gold/USD relationship is not static. It's always changing. In the market, gold and the USD have a dynamic “on-again, off-again” type of relationship. They are the Sam and Diane of global finance, nearly complete with a “will they or won't they” affair.

In the span of my career alone, the relationship between gold and the U.S. dollar has changed. When I first became interested in gold, it had much more of an inverse relationship with the U.S. dollar. It was rare to see the price of gold and the value of the USD move in the same direction.

Today, that's all changed. No longer is it really uncommon to see both gold and the U.S. dollar up (or down) on the same day. And that's been the case for about five years now.

It's likely that part of the lessening inverse relationship between gold and the USD over the past several years is due to new investment products like ETFs, ETNs, ETCs, and cryptocurrency, which have further complicated the link between the two.

But I think the inverse relationship between gold and the USD is weakening in recent years mostly due to the complexity of today's global marketplace. Today there are a million other factors pulling both gold and the U.S. dollar in all directions at once.

Now, I'm unsure if this is a continuing trend. I mean, just because the USD and gold have less of an inverse relationship today than they did just 20 years ago doesn't mean the two will eventually become completely decoupled in the minds of investors. But the fact is the USD and gold do have less of an inverse relationship today. And I don't think the two will have the same kind of inverse relationship they had even 10 years ago ever again.

Nevertheless, the perception that gold and the U.S. dollar always have an inverse relationship is still the absolute most common belief.

And no amount of arguing or debate is likely going to change that anytime soon.

Until next time,
Luke Burgess Signature
Luke Burgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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