Gold x USDX breaks out after Brexit

Last time I looked at the significance of rising gold price and dollar index and their impact on profitability of gold mining companies. One way to study this is to calculate the product of the gold price (in US dollars per ounce) and the US dollar index, divided by 100 to make the numbers easier to use.

As described here, I have been using reconstructed phase space portraits as an aid to describing dynamical behaviour of complex systems. The simplest way of reconstructing these is through the use of time-delay method, in which the value of a parameter is plotted against a lagged copy of itself. These plots show the evolution of the system illustrated by the succession of states through time. Typically, systems will remain locked in relative equilibria for substantial periods of time, punctuated by bursts of rapid evolution to a new area of stability.

Eighteen months ago, for instance, the reconstructed state space for the gold price x USDX over the preceding seven years was easily described by a rising phase, followed by a multi-year cycle that carried it from the middle of the plot to the circled area at the upper right, until in mid-2013 when it broke down and returned to the middle equilibrium.

The system has been locked in the middle equilibrium until what looks to be a breakout, immediately after the Brexit vote.

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It has pushed the boundaries of that equilibrium in the last three years, but the action of the past few weeks is looking decisive. I expect to see gold x USD ascend and reach a stability in the 1400 range, which puts the told price near $1450/oz, given the current strength in the US dollar.

Third phase of deflation coming

But it's good news for gold miners--profits will rise.

The long-term plot of USDX index vs. the gold price shows that the US dollar gold price and the dollar index are inversely correlated much, but not all of the time. Empirically, money-making opportunities have arisen when both gold and the US dollar are rising together, as is happening now.

The blue trend line represents deflation--times when the US dollar gold price and the dollar index rose together. This trend enhances the profitability of most gold companies, as they are receiving a higher price for their product at the same time as the value of the dollars receiving is rising. The most important stretch where this was happening was in late 2009 to about mid-2010--a time when there were a lot of big moves in mining companies, especially those with production stories.

When the graph moves to successively higher isoquants the business of gold mining becomes more profitable. This happens during the deflationary segments, but can also happen if the gold price rises faster than the US dollar falls, as it did in early 2011, when the gold price rose quickly to over $1800 per ounce, bringing us to about the 1450 isoquant.

The segment of the blue line between the 1000 isoquant and the 1150 isoquant occurred in late 2014 to early 2015. Our current deflationary action started just after the Brexit vote. If it lasts as long as either of the last two episodes, we should have an excellent window for making good money in the gold stocks in the next six months to a year. If the dollar continues to be strong, a gold price of $1450 may bring us to the 1450 isoquant.

Coastal Alaska

Good weather when flying down the coast of Alaska, on the way to Vancouver from Beijing. My first photographic survey of the coastal glaciers there in about 20 years.

Glacier, trailing to the upper right.

Mount McKinley (Denali to Alaskans) in the distance.

Glacier feeding into a lake, with another at top.

Glaciers cascading into a fjord.

 

If this is the one I think it is, it has receded quite a lot in the last twenty years. Most of the water in the foreground was under glacial ice the last time I photographed it.
 

 

All of these were photographed digitally, and the colours were rebalanced afterwards. The original shots are too blue. The brownish shading on the left is a reflection from the edge of the window.