Published 12/20/04.

 

Click to enlarge in a new window.Gold and the US $ appear to be opposite sides of the same coin.  A brief look at the chart of Gold and the US $ (monthly closes over the past 9 years) makes it clear that Gold rises when the Dollar falls, and Gold drops when the Dollar rises.  That leads to the conclusion that Gold and the $ are little more than two different ways to make the same wager.  Since Gold is priced in US $, a change in the exchange rate of the $ seems to be directly reflected in a corresponding but opposite change in the price of Gold.


However, the simplicity of equating the price of Gold with the opposite of the $ exchange rate masks an important question.  What is happening to the value of Gold as measured in all paper currencies?  This is an essential focal point for investors who must first decide what proportion of their resources to allocate to hard assets like Gold, with the remainder of their assets used to continue pursuit of  traditional investments which all revolve around paper. 
 

When the US $ drops and the price of Gold (measured in dollars) increases, is that change in the price of Gold due more to Gold rising, or to the dollar falling?  The MoreAU index was created to answer that question.  The MoreAU index is calculated by multiplying the closing price of Gold (in US $'s) times the closing price of the US $ (USDX trade weighted) and dividing by 1,000.  Although it may not be obvious that multiplying the price of Gold times the US $ produces a result with meaning, it can be clearly demonstrated that the MoreAU index is as valuable to use as it is simple to calculate.  For example, if the price of Gold increases (or decreases) , but the US $ drops (or rises) by approximately the same percentage, the MoreAU index will be little changed.  A relatively flat MoreAU index shows that the change in the price of Gold can be directly attributed to the change in the US $ exchange rate.  Conversely, a rising MoreAU index reflects relative strength in Gold compared to the $, and a falling MoreAU index shows relative weakness in Gold compared to the $.  Since the USDX trade weighted dollar is a comparison to other major international currencies, the MoreAU index filters out changes caused by the dollar and shows the change of the value of Gold against all paper currency.

 

The chart at the right shows the MoreAU index for monthly closes over the past 19 years.   As the $ increased in value frClick to enlarge in a new window.om 1995 through 1999, the price of Gold fell faster than the dollar rose and the MoreAU index shows that Gold was weaker than the international currencies.  After bottoming in mid 1999, however, the value of Gold began a strong appreciation against not just the $, but against all paper in the form of international currencies.  The rise in the value of Gold has formed a clear bullish channel which continues to signal that the value of Gold projects future gains which are independent of the trade weighted US $.  Until the MoreAU index begins to fall down out of the bullish channel, investors can expect to be richly rewarded with a buy and hold approach to Gold.  The weekly MoreAU index chart is updated each week for a current view of how gold is performing against all fiat currency.

 

Click to enlarge in a new window.

A similar technique can be used to calculate a MoreAG index (Silver * US$) to filter out changes in the dollar exchange rate and to show how Silver is performing relative to all paper currencies.  The chart at the right shows the MoreAG index for monthly closes over the past 19 years.  From 1986, the MoreAG index flowed in sweeping trends that lasted for several years.  As the Optimist, however, I focus on the fast rising uptrend line since early 2003.  Until the MoreAG index decisively falls through that uptrend line, I see Silver rapidly gaining strength in comparison to the US $.  The weekly MoreAG index chart is updated each week for a current view of how silver is performing against all fiat currency.

 

 

* * * Notice * * *

This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment.  Please do not interpret any portion of this work as investment advice.  If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest.  The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions.  The Optimist wishes you the best of luck in whatever you decide to do or not to do.  Cheers!

 

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