Gold vs the US Dollar Index Since 2003

With the US dollar Index at 90, gold has been at $380, $1000, $1130, and $1900.

The last time I posted this chart, a reader commented “That’s not the dollar, it’s the dollar index. The dollar is buying less and less.”

He failed to note that gold fell from $850 to $250 between 1980 and 2000 with the dollar buying less and less every step of the way. So it’s not a purchasing power thing either.

The best explanation for the price of gold has historically been, and still remains, faith in central banks.

Gold vs Faith in Central Banks

Faith in central banks is highest in long periods of disinflation, when the rate of inflation is generally decreasing. This is what happened between 1980 and 2000.

The dollar was buying less and less, but there was widespread belief that Alan Greenspan, “The Maestro” had things under control.

The “Great Moderation” was followed by the housing bubble, the Great Recession, and a near meltdown in the EU culminating when then ECB head Mario Draghi gave his famous “whatever it takes” speech.

“Within our mandate the ECB will do whatever it takes to preserve the Euro and believe me it will be enough,” said Draghi.

Q: What did Draghi do?
A: Nothing

Yes, nothing. The speech itself was enough. Traders backed off anti-euro and eurozone breakup bets following Draghi’s speech.

What’s Going On Now?

I believe it is increasingly clear the Fed does not have things under control. And neither does Biden, or Congress.