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USDX Versus Gold Indicates Inflation Not Yet Dead
Submitted by The World Complex
I have been plotting the US dollar index against the US dollar gold price for some time, looking for a sign.
Since about Halloween, the graph of USDX against gold price in USD has suggested deflation, as both parameters were increasing. I have previously argued that this behaviour benefits gold miners outside the US, as the number of US dollars they get for their product increases along with the purchasing power of those dollars.
In the past couple of weeks, the graph has reverted to the historical norm, wherein a rising US dollar is met by a falling dollar price for gold.
The blue line represents the deflationary trend discussed here and here, and the gold hyperbolae are isoquants, described here and here. An isoquant is a locus of points where the product of the USDX and the USD gold price is constant. The "traditional" behaviour of gold with respect to the US dollar is for the system to evolve along an isoquant--with the gold price rising as the US dollar falls and vice versa.
In the graph above we have plotted the isoquants for the 1000 and the 1150 level. The 1000 level has been important in the past. The initial rise in the gold price in 2010-11 began by migrating along the 1000 isoquant level, and the collapse in gold price in 2013 resulted in the graph bouncing several times off the 1000 isoquant (and penetrating it slightly twice).
Over the last few weeks the system has been moving along the 1150 isoquant. The 1150 isoquant has had some small influence on the system in the past--there is a knot just below the 1150 isoquant as the gold price rose sharply in 2011, suggesting that 1150 was a difficult level to break above. Similarly, during the collapse in 2013, the curve bounced twice off the 1150 isoquant before running down to the 1000 level.
In the last few weeks, we have seen what looks like a transition from deflationary behaviour to a more traditional behaviour in which gold acts as the "anti-dollar". I don't think this represents a sea-change--I still think there is more deflation to come. But we might see a change in behaviour for some time before deflation returns.
As noted before, deflation was temporarily overcome by the various central bank interventions since 2010. We then had over four years without deflation, before it re-established itself late last year (at least in this index). It is unclear whether we are seeing the result of a new intervention, which will once again probably be temporary (but this could be a long time). Alternatively, we are seeing a battle between investors who see inflation and those who foresee deflation, with the inflationistas holding the better hand, for the moment.
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These charts look a lot like the laser pointer squiggles I make on the floor while playing with the cat.
Who'd have thought that playing with a cat qualifies one to be a financial analyst?
The charts make me dizzy.
Money does well in periods of Deflation.
Gold is Money.
Gold does well in periods of Deflation.
Indeed, Gold does better during periods of Deflation than during periods of Inflation.
Don't believe me? Read "The Golden Constant," or see this post by Mish:
http://globaleconomicanalysis.blogspot.com/2007/02/is-gold-inflation-hedge.html
Best quote from the piece:
"But our biggest problem with the inflation hedge thesis is that it takes our eye off the ball. The critical question today is not whether we face deflation or inflation, but whether and when we face monetary collapse.What is relevant is gold’s traditional role in the context of monetary collapse. This role is not, to our knowledge, in question. Gold is what you want when they seal the borders and you need to get across; it’s what’s accepted when there’s blood in the streets and nothing else flies.
Whatever can be argued about its implications for gold's behavior in inflation, the abrogation of Bretton Woods in 1971 did not change the fact that gold is the only money when the chips are down. This was a major conclusion of Professor Jastram’s research. For the continuing validity of this proposition, we cite as an authority none other than Lord Greenspan, Tsar of All the Monies, Defender of the Fiat, Best Friend of Leveraged Speculators, who testified as recently as 1999 that:
... gold still represents the ultimate form of payment in the world. It's interesting that Germany could buy materials during the war only with gold. In extremis fiat money is accepted by nobody and gold is always accepted and is the ultimate means of payment…
Do I think it merely possible that our fiat dollar will someday collapse? If yes, then I should own gold. How much? As much as I can comfortably rationalize, perhaps using some sort of calculation of the gravity of the harm -- i.e., financial wipeout -- discounted by my sense of the probability of its occurrence.
Do I think it inevitable that our fiat dollar will suffer the fate of all paper currencies throughout history? If yes, then I am a gold bug, and it is my dollar exposure, not my gold “investment,” that I must rationalize."
There are an endless amount of comentators and opinionistas who readily opine on the direction of gold without having any grasp of the real financial underpinngs of the matter or any mathematically based grasp of the overall situation.
"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."
"The question is," said Alice, "whether you can make words mean so many different things."
"The question is," said Humpty Dumpty, "which is to be master - - that's all."
it's bullshit anyway, completely unvalidated.
some downvoter is having a ball on this thread.....
Love me some isoquants! ...gold even more.
Haven't we been in Stag-flation for at least half a decade now?
Soooo...we might have deflation or inflation. Ahh, got it.
No, we ARE having both, right here, right now. Monetary inflation (debt) meet economic deflation (money velocity).
We are seeing deflation in the price of things you do not HAVE to buy and inflation in the things you NEED to buy.
Big flat screen TV's are getting cheaper, luxury cars, and housing (if you're buying) have gotten cheaper.
Food, electricity, water and housing (if you're renting) are all going up.
Energy that you need - think heating your house - hasn't gotten much cheaper despite the drop in oil prices and gasoline and diesel for transportion haven't dropped comparably either. And I still suspect the oil price drop is a politically manipulated one.
Just wait until you see a change in the velocity of $US - at some point when the rest of the world decides they aren't willing to prop up the $US and decide to exchange their $UD S paper holdings for tangible assets, the US will be in for a world of hurt. China and others are already decreasing $US holdings with Belgium? and other entities taking up that reduced demand.
Wtf are those charts to he novice investor
Looks like a steaming heap of bullshit to me. Isoquants are a (highly theoretical) microeconomic concept, but fuck me if I know how you'd go about calculating one, short of picking up any three arbitrary points and connecting the dots.
It appears that someone is just bullshitting through use of big words/graphs to justify a narrative. But hey, isn't that 99% of the gold promoters out there these days?
Edit: The more complex and elaborate looking the degree of the "analysis" and the harder it is for the analyst to justify even the rudimentary logic, the more suspicious you (as a self-proclaimed "novice" should be.) Indeed, many of the most useful tools that an investor might have access to are statistical, and in fact are not all that complex. Things like correlations, regressions, confidence intervals etc. The higher the degree of complexity in the analysis, the more likely that someone has made an oversight, or is just trying to pull the wool over your average joe's eyes.
I certainly will not be putting any stock in this analysis.
Any economist who exclaims "f**k me " is assured of my upvote.
Hmmm. Janet Yellen is an economist.
Tsk, an oz of gold is still worth an oz of gold but the dollar is going from pentagon grade toilet paper to infantry grade toilet paper. I imagine CNBC etal will be telling how bad gold is very loudly.....
Looks like someone's child got a hold of the red crayon again.
Insert it in your isoquant, then look for the proprietary oscillator.
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If I understood all those squiggles, would I be rich?
No, but, leaving your money in insolvent banks run by criminals will make you poor and them rich.
This is what happens when people get married to 'words'. The word itself becomes an idol that they 'worship' at the feet of. Everything therefore bows before the 'word'. If there had been any True 'deflation' - At All, since 2008, the entire economic landscape of the U.S. - and perhaps the globe, would have already changed - Radically. A real, honest-to-goodness 'deflationary' Reset is what the world desperately needs to 'clear the deck', but it has already been Proven that such an event/s Will NOT be allowed to transpire, as long as the existing power struture, 'continuity-of-government', etc., are In Charge...
Isn't the OP just stating that we've been experiencing a postponement of deflation because of the CB's interventionism?
Now it's starting to happen.
Of course there's been deflation. Thats what all those defaults in the last 6 years are.
Of course there's been inflation. That's what QE is.
Whats the net between them? No one knows at any given point. Only in hindsight.
We can only say for certain that the process of filling deflationary holes with QE is a massive wealth transfer, and huge distorter of the economy.
The idea that either deflation or inflation must rule each to the exclusion of the other is false...they both happen simultaneously, the difference being a point of view or a view of particular assets,commodities, or monetary instruments.
Back of the napkin economics
If USDX is up 20 percent against the fiat ring and gold is flat against the USDX anchor;
then
gold is up 20 percent against the ring.
Yes, look at gold in JPY, CAD and Euro terms. Its well off the lows.
Exactly
shit charts mean nothing, gold price doesn't go below 1000/1100$ once because its the production cost for miners
Return on capital for the gold mining industry is at a 40 year low due to central bank gold price suppression.
Apparently the idiot miners are going to die quietly rather than noticing.
Miners annualy account for less than 2% of above ground gold stocks. Gold could drop below production costs of all gold miners for many years wiping out the entire industry.
If you look at the history of the big gold and silver finds in the last two hundred years you see that the real money was made by the bankers and stock speculators. Most of the mining companies themselves were not particularly profitable - huge capital costs offset the profits made.
Those in the industry are cynical as hell - feeling thst the financial entities manipulate the hell out of everything to their own advantage. If you can create 'money' out of thin air then you can manipulate the hell out of the prices of tangible assets. The financial sector has controlled legislation to their benefit as well. Look at the 'Crime of 1873' - the demonetization of silver - back when the banking sector held most of the gold and was violently opposed to any form of inflation in the overall economy. God forbid if those who took out mortgages paid them back in devalued dollars.
And the prices are for paper gold anyway.
Try buying it without a premium.
Gold without premium:
http://www.sklepmennicy.pl/product-pol-429-1000-g-1-kg-Sztabka-zlota-.html
Looks like my Etch-a-Sketch artwork when I was about 5.
It's not dead. It's restin'.
Deflation first [due to defaults, bankruptcies, destruction, etc] followed by rip-roaring inflation:
"Closed for Business" -- Oil Prices Force Bankruptcy Filings in Oil Countryhttp://www.fool.com/investing/general/2015/03/15/oil-prices-force-bankru...
If you stuck a sharpie up a fly's asshole & let him fly around a sheet of paper...it could make the same chart... dyod
Plotting the manipulated vs. the even more manipulated and think you get any meaningful signal? Hello, McFly...?
And since the US Gov't claims all legal authority to interevene in the PM markets using infinitely-printable FRNs...
WHAT THE FUCK AM I SUPPOSED TO DO WITH THESE CHARTS, A-HOLE???
All I see is that the last wiggles seem out of line with recent history. A soaring dollar with record debt and unfunded liabilities, and gold bashed real good. I don't think this new normal - if this is what it is - will be sustainable.
Oy vey goyim! You always gullible. Jewdom’s international Babylonian money creative power in ancient times used precious metals to undermine and corrupt local rightful medium of exchange. Silver and gold back then was ‘international money’. Today ‘credit’ is ‘money’. Today everything Ledger Credit Page Entry ‘money’. All from thin air. That is basis of our power and control. Tangible in-your-hand metals no longer necessary. We control creation and emission of ‘money’ today. We cycle in credit, then pull it back. Kosher tribe now making deflation cycle again. Deflation lets us suck the marrow out of your bones. Buy up fruits of your labor for pennies on dollar. You stupid goyim put your life-force into many things including metals. We buy that up too for pennies on dollar. Metals still have long way down to go. Just like everything else goyim try to use to preserve ‘wealth’. Kosher tribe Talmud says “The possessions of those who are not jews, are to be regarded as property without an owner, and whoever is first to seize the same, is entitled to it.” Oy! Oy! Oy!