The DXY Must Fall

Investment perspectives have become dominated by the macro.

Inflation? Recession? Stagflation? These are the questions every serious investor is pondering. It means all eyes are on the Federal Reserve and what they will do next. The Federal Reserve has truly become the only game in town.

The Fed is the most powerful central bank in the world. Because it’s our central bank and due to our selfish proclivities as a nation, we tend to view the Fed’s decisions only as to how they impact us here at home, without also recognizing that the Fed’s decisions also impact every nation in the world.

The main thinking today is that the Fed must restore faith in the dollar in its fight to end inflation. The argument is that inflation is a long term cancer that could overtake the entire organism, and why all measures must be taken to squash inflation now. The only way to do that is to raise rates to levels that are restrictive, force the unemployment rate higher, and squash demand.

This is the current narrative coming from the Fed.

For linear and short term thinkers, and for those who believe what the Federal Reserve tells us, this would mean it’s not a good time to buy gold. For those who understand the complexities of the monetary system and who can do basic mathematics it may mean the exact opposite.

It all boils down to the investment horizon.

In the short term, should the Fed follow through on their spoken hawkishness, especially while Europe is embroiled in an energy crisis and Japan keeps buying bonds, it is quite possible we will see the dollar continue to strengthen. As that occurs and the DXY rises we could see further short term pressure on gold prices.

For those playing chess for the longer term there has rarely been a better bet.

Gold is priced in dollars. When the dollar strengthens relative to the major currencies, gold prices often get pressured. However, once we understand that the US dollar cannot be permitted to rise significantly higher than where it stands today, then we can take the other side and feel great about timing. I believe that further dollar highs from here will wreck our domestic economy, put additional inflation pressures on our allies, and assist our enemies in achieving their aims.

History informs us that whenever the dollar gets too strong, interventions are put in place to weaken it.

We are at a similar crisis moment again today.

When people today hear me say I am more certain than ever and that I continue to expect the price of gold to exceed $5000 per ounce by the year 2025, too many get distracted by the big number. They are overly focused on recent momentum and diverging central banks, or label the concept a “pie in the sky prediction” rather than one based on logic and historical performance.

One of the first things I hear when I bring up 1933 and 1971 is that we are no longer on a gold standard, and therefore a devaluation against gold is not applicable. To those I say, If I told you in 2001 that the price of gold would increase by more than 3.5X by the year 2008 because the dollar had become too strong and needed to decline significantly for the benefit of the world, would you have believed it then?

This is precisely what happened. In 2001 the price of gold was $276. Seven years later in 2008 the price of gold hit $973.

Of course the only way to validate any long term conclusion is to measure its performance over time.

It has been four years since 'Gold Is A Better Way' hit bookstores. The graphics below demonstrate the quality of the prediction thus far. Notice that gold prices have outperformed the S&P 500, the Dow Jones, and Treasury Bonds. Spot gold prices have already proven a far better way thus far and have significantly outperformed the traditional 60/40 portfolio (which has returned a meager 15% over the last four years) model by nearly three to one.

This scoreboard, however, is a tally through the fourth innings of a nine inning game.

The bull run in gold which has turned sideways over the last couple years is poised to resume its tear higher in the very near term. It’s not only what has happened over the last four years that instills my high conviction. It’s what has happened that so few have focused on that indicates the large upside move in gold prices is still in the very early innings.

There are two main reasons for my extreme conviction today.

One is temporal and has everything to do with the problem of a strong dollar and the global monetary crisis we sit within at this moment.

The second reason is more long term oriented. I call it The Great Devaluation.

Americans have a tendency to think the world revolves around us, and why many at home have missed the real crisis happening around the world.

The world is suffering through tremendous supply side inflation.

The combination of supply chain breakdowns from Covid-19 and the war in Ukraine have resulted in runaway energy costs in Europe and food shortages throughout much of the Middle East and Sub-Saharan Africa. These issues will most assuredly become a feedback loop that negatively impacts the US economy.

It’s only until we recognize that loose and expansionary monetary policies of the last 15 years have benefited the west while simultaneously punishing the economies of the east, will Putin's agenda become more clear.

Consider first the US dollar.

Since February of 2020, the M1 money supply of the United States increased from $4 trillion in to over $20 trillion today. This means that 80% of the M1 money supply in U.S. history has been created in just the last two years. This action was the first official step of The Great Devaluation.