All over the media people are talking about why it is necessary to buy gold and the impending doom of the US dollar. Is this a prudent point of view reinforced by decades of history, or is this view a complacent one that is failing to see what is actually happening? Can the chart of the dollar priced in gold cut through all the chatter and help us determine the relative futures of these to alternative assets? Will gold or the US Dollar be the better performer in the coming years?
What are the facts? Gold has been around since before the earth existed, and since its discovery has had an associated price that people will pay to obtain it. You can mine gold but cannot really create more. The US Dollar was created in 1786, and its value relative to gold was fairly stable until about 1930. From that time the dollar has been in what could be termed a death spiral. Many believe, correctly, this is due to the government’s ability to simply create more dollars.
It is important to note that all fiat currencies are doomed to eventual failure. This is just a simple fact. If a currency has not already failed it is simply in route to failure, but along the way interesting things can happen. For example, take a look at the chart and notice that from 1980 to the year 2000 people desired the man-made paper over nature’s rare yellow metal. This trend change came at a time when the US Dollar performance relative to gold was the worst in its history. From that point, an entire generation of people experienced a US Dollar that trounced gold. In 2000 the US Dollar had appreciated over 100% in its gold purchasing power since 1980. Many people will try and explain the "whys" of that occurrence but the truth is it happened. If something happened, it can happen again. We see it in our everyday lives and all throughout history. The repetition of events. It can also be called cycles. Just like events, price patterns repeat.
Elliott Wave analysis is our best tool in identifying these patterns and their potential trend change points before they happen. These price patterns tend to defy the predominant thinking of the time. Some of you are old enough to remember the years leading up to 1980 and all the fears of continued economic strife including the imminent doom of the dollar. Yet from there its price rose along with the American economy.
In 2000, the trend resumed. Gold continued its beat down of the dollar. The question now needs to be asked, has the trend changed again like it did in 1980 and for how long? The dollar index made its low in 2008 and since then its price has risen about 15%. Gold topped near the end of 2011 and since then has fallen about 30% from its price high.
Based on an Elliott Wave analysis of the long term dollar priced in gold chart, it is likely that the US Dollar has already reversed a near 180 year trend relative to gold. A 300% appreciation is quite likely. This would take the US Dollar priced in gold above the mark it set in the year 2000. I would not be surprised if the dollar took over two decades to achieve this mark or even higher.
This may sound strange and unlikely to most people but most people massively miss the tops and bottoms of price trends. However unlikely it may seem, this is what the price pattern suggests as a high probability. Right now, we could be living through the beginnings of an event of which historians will have no good explanation. What I said earlier still holds true. All fiat currencies are doomed to failure but along the way strange things can and do happen.