February 4, 2010: The two of the greatest forms of money known to mankind--gold and the US dollar--have been at war to take the premier place as a store of value. Gold  has been a winner for a long time and is now increasing its relative strength against the dollar.

The percentage change of gold and the dollar are shown at the top of the white diagonal lines that connect the peaks and valleys in the two charts. The actual prices are shown by the yellow horizontal lines.

Hence, while the dollar fell by 50 points or 41.85%, gold rose by 797 points of 185% between 2002 and 2009. The facts speak for themselves. Gold is a clear winner despite its fall in 2008. There are a lot of people who mock gold. Most of them would be government bureaucrats or central bankers. There is a reason for this. Gold shows the declining worth of fiat currencies controlled by today's governments and central bankers. But let me stop my sound money speech and focus on the charts.

Before we look at the chart of gold and the dollar, let me digress and take you to the chart of the S&P 500. The equity market is a sad case. If you entered the market in 2002, the value of your portfolio would be the same in dollar terms today. Check out the blue box on the S&P 500 chart. Now subtract the fallen value of the dollar from that portfolio and situation looks pretty desperate. 

The inverse relationship between the dollar and gold is very clear from the two charts. As the dollar began falling in February 2002, gold began it's rise. As shown by the blue line on the charts the dollar fell 33 per cent (121 to 80) while gold rose 37 per cent (from 422 to 587) between February 2002 and December 2004. The times are shown at the bottom of white vertical lines and the price is marked by yellow horizontal lines. Then from December 2004 to November 2005 the dollar rose, but gold did not fall. It moved sideways, indicating relative strength. 

Next we have a dramatic phase between November 2005 and March 2008.  The dollar fell 23% (from 92 to 70) while gold rose 79% (587 to 1070), clearly showing that the precious metal increased its relative strength against the dollar.

Then as the stock market crashed in 2008, the dollar rose 27 per cent (from 70 to 89) and gold fell 34 per cent (from 1070 to 696). By October 2008 when gold fell to 696 from 1070 the talking heads on TV and the print media predicted the demise of the precious metal. But the charts were telling a different story. The dollar rallied between March 2008 and March 2009 all the way from 70 to 89, but currency had fallen in November 2005 from 92. The origin of the fall is shown by a white box on the Dollar chart. 

Now let's look at the gold chart. The precious metal never reached the origin point of it's rally (587), clearly showing relative strength. Put simply if you bought both gold and the dollar in November 2005, your gold position never made a loss and your dollar position never made a profit. Also notice that during the March 2008 and March 2009 period gold began to rally before the dollar started to fall, as shown by the yellow arrows on the charts.

Now for the final kicker between March and November of 2009. Dollar fell and gold rallied, but notice that gold went to new highs, even though the dollar did not make a new low.  This fact along with the fact that gold rallied before the dollar in the March 2008--March 2009 time frame show that the relative strength of gold is continuously increasing, which points to greater explosive moves in the precious metal in future.

Right now gold is in correction, which often happens after a strong move up. The same happened in the past when gold moved in 696 and 1070 area. If gold closes below the 1070 area on the monthly chart, we may see more correction. But we believe that long term trend of gold is up and that of the dollar down. Given the total disregard of the US government to protect the value of it's currency the market's long term confidence in the dollar is low. In this scenario we would increase gold holdings in our portfolio.

Chart Analysis

Dollar, gold & S&P 500

Also read our previous reports on gold:

Gold ready to break consolidation

Does gold have more upside?