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The Price of Gold in light of US Dollar

After a long, long rally, gold spent a week trading back and forth at the end of the G20 meeting in Seoul, Korea. The displeasure directed at the United States and our foreign exchange policy has triggered a rally in the value of the US Dollar (USD). Given the magnitude of the downside move that the USD experience since early August, 2010, it’s not surprising that the selloff finally broke. It is surprising that it took so long and the USD sold off so far. The price of, which has been tightly correlated to the fortunes of the USD recently has also broke its long rally.

I’ve occasionally sounded the trumpet about the price of gold being in a bubble, but it’s not always clear that a bubble is a bad thing. A price bubble is great for everyone involved, until the bubble bursts. Though the rally in the prices of gold and silver has been powerful in dollar size, is it as impressive when considered in terms of real dollar movement?

Let’s do some math:

Worldwide annual gold production is somewhere in the neighborhood of 50 million troy ounces. Let’s assume, for the sake of argument that all the gold available was produced in the last 20 years. This is not true, but is makes our assumptions a bit easier and prior to 20 years ago, the annual production of gold was likely not the same as it is today. So assume the worldwide availability of gold is 1 billion troy ounces. Now at $1370/ounce, that seems like a lot: $1,370,000,000,000 or $1.37 trillion dollars. While more than $1 trillion is a lot of dollars, it’s really less than what the Fed did to try and stimulate the economy at the end of 2008 and early 2009. That total was $1.7 trillion.

However we’re looking for relative values to inform the magnitude of this move. We want to know if a 20% rise in the price of gold, from $1150/ounce in August 2010 to roughly $1370/ounce in November 2010 is a big move. The 20% increase in the price of gold represents a gain of approximately $230 billion.

Over the same time frame, the US Dollar, as measured by the DXY Dollar index, has declined in value by approximately 8.5%. While measuring the total number of dollars in existence in the world is a difficult request, reasonable estimates put the number at $12-$20 trillion. For the sake of our argument, let’s call it $15 trillion. An 8.5% decline in an asset with the notional value of $15 trillion dollars represents almost $1.3 trillion of lost dollars. That some of those dollars were turned into gold is not surprising, although perhaps the insistent tone of some market commentators, myself included would lead you to believe otherwise. The size of the magnification effect is interesting and could be important going forward.

If gold were the only thing that people were buying, it’s likely it would represent a much larger chunk of those $1.3 trillion lost dollars. Clearly there are other assets out there that hold some appeal for investors. Markets are never as one-dimensional as a writer can make them seem. Though the price of gold has moved far to the upside, there have still been people and traders who want to sell gold. If there’s a buyer pushing the price of gold higher, there’s someone on the other side of that transaction who believe the opposite thing as you and who expects to profit just as much. It’s important to always keep in mind that nothing happens in a vacuum and you should always make the right decision for you about when it’s the right time to buy gold, buy silver or when it’s the right time to sell gold and sell silver.

Christian Koch is the VP of Market Research and Product Development for Buy N Sell Gold. Check out the Buy N Sell Gold Blog and Buy N Sell Gold.

Looking into trend following indicators which is a way that people will use to invest in the stock market. This strategy will be used to compare how stocks have done in the past, the trend of ways they have moved on the stock market.

Using this method will be a way that people will know how and when to invest in the right stocks. Which will offer the best chance at profits, and how well they have done in the past will be figured into that strategy.

When traders do this type of method they will not be forecasting the stocks and what is going to happen. Instead they are simply following a trend that has been shown in the past. Looking to the current prices of the stock, equity levels and what the market\’s current volatility. Those are the main components that will be used by the trader when using this method.

This type of method will be used only after the stock has established a trend. In other words not on a new stock that hasn\’t yet established any type of trend to it. Price will be one of the main considerations in this method. A person who trades through this method may use indicators to figure out which way the stock will go next.

It will need to be decided how much will be traded during the trend and how long it lasts. When the market is at a higher volatility level size of trading will be reduced in order to cut losses. With trend following indicators, time and price will always be of highest importance.

The following questions will be able to be answered when you use this type of method. Shares that will be traded during the trend, how to enter the market and at what time. Risk to be taken on each trade, cutting of unprofitable stocks, and how to get rid of profitable stocks.

Find more on ETF trend trading and trend following trading systems.

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