Wednesday, March 30, 2011

Chart of the day - Gold US Dollar ratio

Here is a 3 year daily chart of the Gold / US Dollar ratio. (The Gold price divided by the price of the US Dollar Index) 

 Since the financial crises in 2008, the ratio has been in an up, pullback, consolidate, up market with higher highs and higher lows. The ratio just broke above the highs in late 2010 and will most likely head higher going into the latter part of this year.
Just like the US Dollar / Silver ratio chart below, there are 3 factors which cause the ratio to move higher:
Gold flat, US Dollar declining
US Dollar flat, Gold rising
Gold rising and the US Dollar declining - Current trend

For reference, here is a 3 year chart of Gold (Dotted line) and the US Dollar (Black line)

OK, so the ratio is heading higher...what does it mean?  The value of Gold is appreciating against the US Dollar - which is good for those that own Gold.  But inflation will continue with higher food and oil prices.  If Gold is up 17% for the year and Inflation is up the same amount, we have just kept up with inflation.

So how can we get ahead of inflation?  Mining companies may provide one way to do so, but a lot of due diligence is necessary.  One way to take away the volatility of owning an individual mining company is to own a mining ETF or mutual fund.  There are plenty of them out there to choose from.  Two of the popular ETF's are the Van Eck Gold miners index GDX (34% gain in 2010) and the junior's GDXJ (67% gain in 2010)

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