A Case For U.S. Dollar Undervaluation

The case is made by Ivan Marchev in a Motley Fool article entitled "Why I'm Bullish on the Dollar;" it deals with the U.S. dollar/Euro relationship. His case is that the greenback is undervalued with respect to the Euro on a purchasing-power parity basis. Fair value on that ground, using German and American purchasing power levels, would be about US$1.25 for the Euro. Since the Euro makes up for about half of the U.S. dollar index, being bearish on the Euro is tantamount to being bullish on the greenback.

The implications for gold, he believes, are bullish long-term because his bear case for the Euro is based upon the need for the European Central Bank to keep inflating. On the other hand, he's short-term bearish on gold from a buying-opportunity perspective. He believes that gold would be a good value if it drops to US$1,000/oz, ane even more so if it drops to $900. He believes that a drop to the latter price is "possible if the turmoil on the Old Continent accelerates, and the euro drops to $1.25. Gold was below $900 in March, when the euro last traded at that level."


What he doesn't seem to realize is that a decline of that magnitude, in percentage terms, would match the financial-crisis decline from February 2008 to November of that year. Without a similar crisis, I don't see gold falling by that much.


Gold's recent troubles are the subject of a brief Seeking Alpha write-up by statistician workhorse Bespoke Investment Group. The article notes that, after gold broke below its 50-day moving average in mid-December, it's had trouble rallying above that average.