Spot Gold - November 3, 2022

Gold's Performance In Previous USD Index Bull Runs

At time of writing, the U.S. Dollar Index stands at 112.904 and is technically in a new bull run. There have been two previous bull runs for the dollar as a fiat currency. The USD Index was actually at or above 120 throughout the late sixties into the early seventies when the dollar was still backed by gold. As soon as the Nixon Administration decoupled the dollar from gold in August 1971,  the USD Index would begin a steady fall and by November/ December of that year, the index fell below 112 and eventually found a bottom at 83.070 on October 2, 1978. That was the year FED chair Paul Volker began raising rates, which would peak at over 20% by 1980 and stay in the double digits until 1990.

The early eighties, correlating with Volker's interest rate policies, saw the USD Index eventually shoot to a record 160.410 on February 1, 1985. This marks the first bull run for the (Fiat) USD. What followed after this period was a steep, sharp and sudden decline in the USD, down to 85.42 on December 1, 1987. In just 2.5 years, the USD Index almost halved!

The dollar would not begin to climb again in earnest until the summer of 1995 when it bottomed at 81.57. It would eventually peak for the second time at 120.28 in January, 2002. As with the previous bull run, there followed a decline but not as steep, yet a little more prolonged. Since the peak in 2002, we now see that it took more than 20 years for the index to climb back above and hold 100 (although there was a brief period in early 2017 when the USD went above 100).

Looking at the USD Index chart for the last 50 years (seen here), the last two bull runs are easily identified. Yet, in the new bull run that is forming now, the rise is much sharper. It took the previous bull runs to go from 100 to 112 about a year and a half to two years. The USD managed to do that in just the last 6 months.

Of course, all of this is directly attributed to the Federal Reserve's interest rate policies. As of November 2, 2022, there have been four consecutive 75 basis point rate hikes since May. This is the most aggressive rate hike since Paul Volker. When an interest rate hike is implemented, it takes 9 to 12 months to propagate through the system. This would explain why the USD hit 160.4 in early 1985. The lag in response time to his rate hikes would be felt further on down the road.

There are rumors the dollar is going to 120 or higher. The FED has hinted of more rate increases to come so this essentially guarantees a stronger USD. We are only now just starting to feel the effects of the first rate hike and there are 3 more rate hikes to propagate through the system. It seems a foregone conclusion those rumors are going to come true, likely in the new year. 

With the historical data available, we can chart how gold behaved before, during and after the previous two USD bull runs of the early eighties and Y2K.  Gold performed very well through the mid Seventies, peaking at just under $200 in 1975. The 1970s saw high inflation and the Saudi oil embargo after Nixon gold / dollar severance. The rise in the gold price during this time is directly attributed to this.

Then came Volker in 1978 and his interest rate spikes which would send gold to almost $850 in January, 1980. It would eventually drop to just over $300 by 1982 and there it remained range bound between $300 / $400 until 2005, when it finally surpassed the $500 mark again. A peak in the gold price came about a year and a half after Volker's first rate hike. Does this suggest some kind of spike in the gold price is coming sometime in the new year?

Before the USD's second bull run (peak, January '02), gold behaved poorly, falling to the $250/ $270 handle through much of the late 90s and would not climb back above $300 until February, 2002, just a month after the USD peaked. From there, gold began a slow but steady ascent. By September 2007, gold finally surpassed the $700 mark again. Gold would finally breach its previous record set in 1980, in January, 2008.

From this analysis, in the USD's first bull in the early eighties, gold peaked five years before the USD peaked at 160 in 1985. In the second bull, the gold peaked in May, 2011 at $1,945, some 9 years after the USD index last peaked, in what turned out to be a slow and steady rise in the gold price. Does this suggest gold will continue to rise, albeit slowly over the next few years?

The two previous USD Index bull runs seem to suggest either a huge spike is coming in the price of gold, or, the price holds steady but inches higher and higher as the weeks, months and years pass. If it is a spike, it will be fairly quick, followed by a sharp decline that brings people back to reality. If it inches higher over a longer period of time, then it would give us more time to react if we want to buy or sell. Same goes for silver as it usually behaves in tandem with its yellow cousin.

I'm just having some fun to see if I can discover a pattern. It does show me that nothing can be exactly predicted. Also, gold has now had three historic highs since 1971, the last of which was in August 2020 when gold hit near $2070. This peak can be attributed to the Covid-19 pandemic and it makes me wonder if we're in for a fourth peak in the near future that will be attributed to central bank actions as the first two were.

Which begs the question, 'Why are central banks buying gold at the fastest pace in 55 years?'.

(Most of the info was compiled from historical graphs. Dates and numbers may not be exact but are accurate.)

Spot Gold = 1980 Year Chart

Spot Gold - 1968-2000

Spot Gold - 1975 to Present

Do you see any pattern(s) I might have missed? Let me know in the comments section below.

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Name's Joe and I live in Ontario, Canada. I like writing on a wide variety of topics. I enjoy keeping track of markets, investing and commodities and the crypto sector. Also do some coding for web browsers.

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