Breakout of USDX vs gold

It has been awhile since I last mentioned gold (at least as far as price is concerned). That was because nothing significant has been happening. Something seems to be now, however.

The diagram below shows the trajectory of the system defined by the US dollar index and the gold price. Contrary to common belief, the gold price does not simply rise as the dollar falls--

My interest in this is the effect of the US dollar index and the gold price on the profitability of mining companies. For a gold company outside the US, with revenues in dollars and expenses in local currencies, the value of the US dollar may be as important as the price of gold. In fact, the US dollar may be more important, because a rising gold price is sometimes accompanied by "windfall taxes". If the US dollar has fallen in accordance with the rising gold price, the company may not actually have received a windfall at all. Furthermore, if the US dollar were to rise instead (and gold remain roughly constant), this would be a real windfall for these companies, and normally taxes are not raised in such a case.

In some previous articles I introduced the concept of the "isoquant", which is a locus of points where the product of the gold price and the US dollar is a constant. Much of the time, the trajectory of the system follows one of these isoquants--they represent the path of least resistance, being the "default" that everyone expects. Most historical moves at least start along an isoquant.

Given the size of the blot represented by the last three years of activity on the above chart, a move above $1400 is imminent. Such a move would be very small in the chart above. My prediction is for this coming move to approach the cluster in early 2013, before the gold price fell dramatically in the middle of the year. That would put the price near $1600. A move of this magnitude should take about a year to complete.