Dollar Falls Sharply as Gold Approaches It’s All Time High… Again

Vampire: the Eternal Struggle
As my personal friends know, I’m a gamer geek. My collectible card game (CCG) of choice is Vampire: the Eternal Struggle (VTES). It’s Richard Garfield’s (the designer of Magic: the Gathering) second CCG and he designed it for multiple players. It’s a game I enjoy playing competitively.

Every year, White Wolf (the company that publishes VTES has a North American Championship. In order to play in this tournament, you first have to do well in a qualifier tournament which every region has. This weekend, Los Angeles had its qualifier tournament and I enjoyed playing in it (I didn’t qualify). Since VTES has a small but loyal player base compared to other CCGs, you get to know everyone pretty well who competes on a national level. We’ve become a pretty close knit group despite the fact that we all live in different regions; our willingness to travel and our love of the game brings us together.

Well known members of this tight-knit circle include Ben Peal, and a married couple, Robin and David Tatu. They have all purchased my book and found it a good read. Both of the Tatu’s were at the tournament this weekend, and I commented to them that my investments were up some 50% over the last six months. They recommended that I sell my gold investments before they crashed. Now, I found it a bit peculiar that two people who told me that they learned a great deal about how the economy works from the book that I wrote would then tell me to sell gold.

It does make sense in a human nature kind of way. The knee jerk response I’ve gotten when I tell people how much money I’ve made off of my gold investments is “Sell!” It’s a bit of conventional wisdom that has its roots in reality. After all, trees don’t grow to the sky and what goes up must come down. If something’s up 50%, then it must be time to sell it.

Well, yes and no. It’s true. Trees don’t grow to the sky, and 50% is a fantastic profit from one sector. However, gold has not appreciated 50% in the past year. It closed 2008 at a 5% profit. Gold mining stocks, which is where I have actually made most of my money, opened the year at $49.24 (as measured by the ETF GDX) and closed the year at $33.88- down 32%. The reason I have shown such profit on gold mining stocks is that last year was a volatile year and I bought the bulk of my Barrick shares at close to the bottom of its range.

Last year Barrick bounced around from between $50 a share and $18. It closed Friday at $38. If you bought in at the right time, you made a killing, but that’s not because the stock itself has gone through the roof as much as it briefly traded at phenomenally low levels that you could capitalize on that if you were a sharp trader. But there is some truth to the notion that if you’re holding a stock that’s up 50% from where you bought it hoping for it to go even higher then you’re just being greedy. At least, that was the logic I was operating under when I sold my Barrick stock at $35.50. I took all the money from that sale and plowed it into gold bullion (the GLD ETF).

Barrick’s now trading above where I sold it at, but gold bullion has also appreciated a roughly equal percentage from where I purchased it, so I’m pretty happy. I have started wondering if and when I will sell a portion of GLD. Gold bullion has been on a pretty wild ride over the last six months as you can see on the chart below.

Gold closed last week close to $960 an ounce which was mostly due to continuing weakness in the dollar. The USDX index, which measures the strength of the dollar, has fallen quite a bit lately. Here’s a chart of that.

The story that these two charts are telling us is that the dollar, which was trading internationally at an all time low last summer, is beginning to slip once again back to the basement. Gold has gained in value as the dollar has slipped. It seems like the dollar is going back to test its lows while gold is going back to test its highs. My intuition tells me that gold is going to set a new all time high in the next sixty days or so as the dollar goes back to trading in the low 70s on the USDX. So I plan on holding my gold bullion even as gold cross $1000 an ounce.

We’ll see how it turns out. It should be a wild but profitable ride.

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