Looking At A New Ratio Chart: Gold In Terms Of The U.S. Dollar Index

The Kitco Gold Index has performed a useful service in factoring out U.S. dollar changes from other influences on the gold price. Since only one influence is factored out, what's left is a catchall category called either "predominant buying" or "predominant selling."

A similar proxy comes from dividing the gold price by the U.S. Dollar Index. That ratio shows what one ounce of gold would cost if it were possible to buy it in U.S. dollar index units in a transaction-cost-free and perfectly arbitraged market. The daily chart, which like the others below are courtesy of Stockcharts.com, shows a almost perfect similarity to spot gold itself:





However, the longer-term chart of both shows at least two noticeable differences:





Note that the gold price was higher in February of '09 than it was in July of '08. The ratio of gold to the Index, though, was lower. This non-correspondence shows that gold went up more than would be expected given the greenback's rise in that period. On the other hand, the gold-USD Index ratio rose significantly from February to June of last year, while the gold price fell slightly in that timeframe. That difference shows that the U.S. dollar's fall in that period outpaced gold's rise.


For the last six months, as shown by the first pair of charts, the gold price in regular U.S. dollars has been moving in virtual lockstep with the price in terms of U.S. Dollar Index units. So, it's no wonder why it's now held as given that the greenback's driving gold.

The difference in the longer-term chart clearly shows gold demand as a safe-haven asset. That demand shows most clearly in the waning days of the Bush Administration. Since the February stock-market rout, that demand has at least partially dissipated. The rout marked the high point of crisis demand: as of the mid-to-late March peak, gold was down with respect to February's peak; but, the gold-to-USD-index ratio peaked at about the same level.

Sorry to say it, but there's been no obvious evidence of any safe-haven demand subsequently. It evidently takes an all-out credit crisis plus emergency inflationary measures being hurriedly slapped together - both factors have to be present - before safe-haven demand kicks in mightily.