Australian dollar, gold smacked

It’s awwn this morning for gold and the battler. The Aussie fell right through its post 2009 low in the mid 73s and gold collapsed:

Of course gold is a another not insubstantial element in Australia’s terms of trade.

For those hoping to pick up some yellow metal here is my recent post:

For all of the arguments that support the price – supply and demand, inflation or deflation, safe haven status, etc – none comes anywhere near the influence of it’s most crucial role and price driver.

Gold is a currency, yes, but of a very specific kind, it is the undollar, the foil to the dominant reserve of the day and so long as its value is rising then gold will do the reverse. Do not make the mistake of thinking that that relationship is one-to-one, either. It is to the underpinnings of the reserve – relative monetary, fiscal and strategic strength – that gold is most leveraged to so it can run much more or less than the currency itself.

Circumstances at the moment are especially unfavourble to gold because they are so very favourable for the US dollar. If the global cycle can march through current difficulties then the US economy is best placed to benefit and most likely to raise interest rates. If the global economy does succumb to current risks in Europe or China then the US dollar will also rise on safe haven flows irrespective of monetary tightening. Thus it is lose-lose for gold.

Yet it has not returned to anything like its former value because US dollar strength, or more to the point the regime that underpins it, is much weaker than it used to be.

Not until the next major economic shock, during which the US dollar will likely soar and gold crater, will it be time to buy gold. Exactly this transpired in the GFC when the precious metal fell 30% from $1000 to $700 before rocketing:

For a repeat, the case will need to be built upon the prospect of a return of stimulus in the US that is extraordinary enough to undermine its currency. As Japan discovered over decades of deleveraging, quantitative easing loses its power on markets each time unless it gets bigger and bigger. The good news for gold is there is a very good chance that that will be the case.

In the meantime the gold chart is not pretty. The monthly chart illustrates the same huge bearish descending triangle that we see on iron ore at the moment. A break below the $1130-1150 range will be very bearish.

There’s no rush to buy gold. Yet.