Gold is NOT At An All-Time High, and the Gold Rally Could Suddenly Reverse if Dollar Strengthens

Everyone knows that gold is now at an all-time high, right?

Wrong.

As Barry Ritholtz points out:

While everyone seems to be all abuzz over Gold’s new highs, you should be aware that these are nominal, not real highs.

Adjusted for Inflation, Gold is nowhere near its all time peak — in real terms, its only about half its prior highs:

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gold REAL dollars
courtesy of Bianco Research

[click for full chart]

And MarketWatch notes:

Gold’s performance in the euro, British pound and other currencies has been lackluster compared to its rise in U.S. dollars, a trend suggesting investors are more interested in bullion as a hedge against the greenback than global inflation.

That sensitivity also means the gold rally could quickly reverse if the U.S. dollar gains ground, one analyst warned.

“The lion’s share of the gold-price increase is due to the weak dollar,” said Carsten Fritsch, a commodities analyst for Commerzbank in Frankfurt. “Once things make a turn there, you could see a quite rapid correction in gold prices”…

In British pounds, gold has sunk about 6% from February highs and is up just 6% for the year, based on pricing of the most active contracts at the time.

In Australian dollars, the metal has tumbled about 25% from its February highs and has actually lost ground for the year.

The disparity reveals just how crucial a role the falling U.S. dollar has played in driving up gold and other commodities prices.

Gold is usually seen as the ultimate currency – a liquid investment that holds fast when paper currencies depreciate, potentially because inflation is rising. But in recent months, investors seem to be treating the metal specifically as a hedge against the dollar’s drop than a deterioration in currencies in general.

For arguments for a strengthening dollar, see this. For my view of gold in the long-term, see this and this.

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