So far this year Gold has not been the place to be unless you bought it in mid-December 2017 and sold it in late January for a roughly ten percent gain. Since a high of $1,362 per ounce on January 25 gold has been in fairly steady decline that has recently seen it bouncing around the $1,190 mark. In the short term it looks to be going lower. As any experienced investor knows, it is when something is out of favor with little positive sentiment; it is the time to start looking at it closely.

As most investors know the most important medium term determinant in the price of Gold is the strength of the U. S. dollar against other currencies. In this regard the medium term price of Gold chart is an almost perfect inverse mirror of USD Index chart both in direction and percentage terms. There are of course some important longer term factors that will come into play that determine the relative percentage movements and these must not be forgotten but predicting the price of gold in the short and medium term largely involves predicting the strength of the U S dollar. Major geo-political events can certainly create large upside movements but are usually short lived and almost impossible to predict. Experienced gold traders will sell into these events.

So to the U S dollar. It has been beating up world currencies for some time now with no immediate signs of stopping. For anyone expecting a big turnaround in Gold, a good look at the 20 year chart of the USD Index, is a reminder that the bottom may be a long time coming. What becomes obvious is roughly a six to eight year pattern that more or less coincides with the general business cycle. Now depending on how one interprets the chart, the latest upward wave began in 2014 and will not reverse until 2020 at the earliest. Again, subject to technical interpretation, we could see a cycle completion in 2020 with the USD Index in the 115 to 120 range. This would represent a 20 or so percent increase from the current trading range of 95.If the price of gold does the normal historical correlation we may see the price drop to as low as $950 an ounce.

For the average investor it is important to keep the above logic in mind. Much of what is written about Gold is produced by what are called “Gold Bugs”. These are people who either because of genuine belief or vested interest see all things pointing to scenarios where Gold goes to $5,000 or even $10,000 an ounce. Some of their arguments are quite compelling particularly when talking about massive government debts, bank failures and other financial catastrophes. History does repeat itself and there will be another melt down. We just don’t see it happening for two or three years.

In any event we recommend that all investors keep a minimum of three percent of their total portfolio value in actual physical Gold in small denominations just in case the Gold Bugs are right.

Justin Hsu, Commodity Analyst, Asia Associates