Gold Lacks Intrinsic Strength

A few days ago my friend, Tom McClellan (www.mcoscillator.com), wrote a piece about how the GolDollar Index reflects very low internal strength in gold, even though gold is approaching all-time highs. With Tom’s reminder, I thought I should offer my perspective on this event (with my apologies for any overlap).

The GolDollar Index was invented by Tom McClellan, and is calculated by multiplying the price of gold by the U.S. Dollar Index. (We divide the result by 10 to keep the numbers from getting too big.) Its purpose is to cancel the effects of currency fluctuations on the price of gold. By comparing it with the spot gold index we can determine if there is inherent strength/weakness in the price of gold.

For example, all things being equal, if the dollar is falling, gold should rise at a proportionate rate. If gold is rising at a faster rate, it means that some factor (supply and demand) is giving gold a higher relative strength.

This inverse relationship is by no means iron-clad. For example, from the lows in November 2008, both the dollar and gold rose more or less together, causing the GolDollar Index to move to all-time highs, and reflecting overpowering demand for gold.

The inverse relationship between gold and the dollar was restored at about the end of April, and you can see that the dollar and gold are now clearly moving in opposite directions. The problem, which Tom McClellan pointed out, is that the GolDollar Index is rising at a very shallow angle, reflecting that gold’s intrinsic strength is currently quite low. At least gold is still rising and benefiting from the dollar’s weakness.

Bottom Line: The immediate problem with this situation is that gold is approaching major resistance at $1,000, a level from which it has been turned back twice before. The weakness reflected by the GolDollar Index implies that gold may be turned back a third time.

Another way to look at it is that gold is simply digesting the huge surge of demand it experienced between November and March, and that higher demand could materialize if the $1,000 level is penetrated.

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