Buy Silver and Gold. The dollar doesnít matter! (posted 8/14/08)
Color me green
The Optimist wants to demonstrate that he is sensitive to the environment by recycling one of his old commentaries. This seems like an appropriate time to reinforce the title of this work because pundits everywhere are focused on the soaring dollar, and on the corresponding carnage in precious metals prices. Many people are amazed that the dollar can rocket higher in the face of probably insurmountable financial problems in the USA, while other people are convinced that the dollar has room to advance further. The Optimist is skeptical that the dollar will maintain its recent gains, but he tries to skip to the beat of a different drummer. I hope readers can find a catchy rhythm here.
I said it before
My 2005 commentary Buy Gold and Silver. Ignore the dollar! made the point that the dollar, euro, yen, and all the other currencies are fiat, with no more intrinsic value than the paper and the ink printed on them. The dollar goes up, or down, but only in a teeter totter comparison to the other fiat currencies which it is measured against. Silver and gold, in contrast, have real value which is independent of exchange rate fluctuations among the various fiat currencies. Since the purchasing power of all fiat currencies is deteriorating over time, the value of silver and gold increases in comparison to all fiat.
Same song, second verse
Americans and many other people around the world measure the price of silver and gold in U.S. dollars. Unfortunately, the U.S. dollar is a benchmark that flexes up and down against other currencies like a yo-yo. Using a variable FOREX exchange rate as a basic measure of precious metals prices adds a substantial amount of volatility in the changes of those prices. Admittedly, those changes feel wonderful for precious metals bulls when the dollar weakens against other currencies. Unfortunately, the dollar can also strengthen against other currencies, like it has in the last few weeks, and many of us feel the pain caused by using an exchange rate to measure prices. Live by the FOREX, die by the FOREX!
The price volatility created by changes in exchange rates provides great opportunity for short term traders who can master the price swings. For those of you who have that skill, there is no need to read more of this commentary. The Optimist is an acknowledged failure at buying swing bottoms and selling the corresponding tops, so no such advice will be offered here. Instead, I prefer to focus on value investing in which I look for relatively low value zones in which to buy, and relatively high value zones in which to take partial profits.
A better way to view silver and gold value
For readers who dislike the roller coaster price cycles of extreme highs punctuated by excessively lows, and who share the Optimistís preferred approach of value investing, I offer a different way to view the value of silver and gold. My preferred approach is to reduce the volatility caused by currency exchange rate swings, and to chart the value of silver and gold against all fiat currency. I do that by multiplying the USDX dollar exchange rate against the dollar price of silver to create the MoreAg Index, and against the dollar price of gold to chart the MoreAu Index. Additional background information about this approach is presented in the Optimistís Gold & Silver page. The basis for this approach is that FOREX exchange rate variations in any currency are directly reflected in the changing price of silver and gold when measured in that currency. When the dollar increases (or decreases) by 10%, for example, that 10% change in the dollar currency exchange rate is directly imposed on the price of silver and gold when measured in dollars. If the dollar price of silver and gold declines (or advances) by the same 10% as the dollar exchange rate in this example, then the value of silver and gold (compared to all fiat) did not change appreciably. The MoreAg Index and MoreAu Index filter out the exchange rate changes in the dollar, and directly show the underlying value of silver and gold.
A picture is worth a lot of words
As a more graphic example, consider the chart below of the MoreAg Index updated after the trading on 8/08/08. I update the MoreAg Index chart for the week each Friday evening. The MoreAu Index also shows a comparable chart for gold.