I attended an investment conference this weekend, and during the precious metals part of the discourse the keynote speaker asked the audience a question. He asked, “What is the single most important factor driving gold prices?” Having been in the precious metals industry for decades, I knew the answer immediately. My hand shot up, and I whispered the answer to those around me, some of whom looked at me as if I was either a genius or insane. After some coaxing, I noticed a few others cautiously raise their arms as well. The vast majority of the audience, however, looked clueless.
The speaker then took out his wallet, removed a crisp one dollar bill from within and held it up for everyone to see. “The value of the dollar,” he said, “decides gold prices more than any other single factor. A strong dollar means weak gold prices, and vice versa.” I was vindicated in front of my peers, but the initial response of the group stuck with me. How could gold’s inverse relation to the dollar not be more commonly known?
When I was growing up in a little town in South Carolina, there wasn’t much to do in terms of recreation besides catching lightning bugs and going to the local school’s playground. The see-saw, or teeter-totter (depending on where you grew up) was a staple on many playgrounds, and it serves as a simplified example of the relationship between gold and the dollar.
When the dollar loses value due to overprinting, it requires more dollars to purchase the same amount of gold. Thus, lower dollar = higher gold. Granted, this is a simplification of sorts, but one that is surprisingly accurate in terms of technicalities. So, if you think the dollar has hit rock bottom and will soon rebound, avoid gold. If you think that U.S. monetary policy is too loose and could result in the dollar losing more purchasing power, gold could be your new best friend.