European Central Bank President, Mario Draghi, has been trying to lower the value of the euro by promising to pursue inflation with a vengeance. His inflation rhetoric was stepped up during a speech he gave to Germany on November 20th of this year. In that speech Mr. Draghi vowed to “do what we must to raise inflation as quickly as possible.”
Draghi’s efforts to crush the euro have somehow been taken by Wall Street as a great opportunity to sell gold. But there shouldn’t be a person alive having an IQ greater than a mentally challenged ameba that can rationalize why it is appropriate to sell gold simply because of Mario Draghi’s obsession with creating inflation and destroying the euro.
Most investors will tell you that the primary driver for the price of gold is the direction of the U.S. Dollar Index (DXY). Therefore, the only due diligence Wall St. recommends regarding the direction of the gold market is to take a perfunctory glance at the DXY, and to hit the sell button on paper gold ETFs if it is up. While it is true that the purchasing power of the dollar is a key metric to judge the direction of gold prices, the DXY will only tell you what the dollar is doing against a basket of 6 other flawed fiat currencies.
The main component of the Dollar Index is the euro currency, which represents nearly a 58% weighting in that basket of currencies. Therefore, if the euro is falling the Dollar Index usually rises, regardless of the fundamental condition of the currency. When it comes to valuing gold investors must first determine what is going on with the real, or intrinsic, value of the dollar. In order to truly access the intrinsic value of the dollar you must determine: the level of real interest rates, the rate of growth in the money supply and the fiscal health of the U.S. government. When analyzing the dollar using those metrics, it becomes clear that the intrinsic value of the dollar is eroding and, therefore, should cause the dollar price of gold to increase regardless of what is going on with other fiat currencies.