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The International Monetary Fund created the SDR in the late 1960s to supplement the gold and other currencies held by countries as their reserves. The value of 1 SDR was initially defined as the same amount of gold as 1 USD. At the time, the USD was convertible into gold, so most countries chose to hold the bulk of their reserves in dollars instead of gold.

In 1969, tight US monetary policy lead to fears that there wouldn't be enough US dollars available for reserve holdings. These concerns lead to the first issuance of SDRs in 1970. As the USD ceased to be convertible into gold in 1971, the SDR's value was changed from a specific amount to gold to a weighted basket of major reserve currencies, which today includes the USD, EUR, JPY and GBP.

As you can see on the chart, the SDR and USD were very close in value in 1985, but the SDR has held up a bit better than the USD in the years since then. In 2014Q3, the USD is worth about 25% of its 1985 value, while the SDR retains about 40% of its 1985 value.

IMF Special Drawing Rights, since 1985

Click for PDF version

There has been talk recently of making the SDR a more important part of the world's monetary system, possibly even replacing the USD as the world's reserve currency. I don't know how this will play out, but I will be tracking the SDR on it's own page going forward. You can read more about the SDR in this report from 2009, and see the details of its current makeup and value on the IMF's SDR page.

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This week, government currencies and bonds were higher, while stocks and commodities were mixed. Long term treasuries, represented by TLT, had some of the largest gains both for the last week and the last month, but it may be time to sell – more on that later in this update. Bitcoin and the HUI gold stocks have been the weakest asset classes for the last week and the last month, with silver and platinum also hit hard. Coffee continues to be one of the strongest performers, over the last week, month and year.

Gold stocks, which were looking promising a few months ago, have been unable to breach the 6 gram level, and since mid-August have collapsed. They closed this week at 4.94g, the lowest level for this year, and just above last year's low of 4.86g, which was the lowest level seen in 14 years.  Silver also continues to decline, hitting a low of 0.436g on Wednesday before recovering to close the week at 0.442g – its lowest levels since 2009. Platinum, although hit hard during the last month, is virtually unchanged from a year ago.

TLT, the 20 year treasury bond fund, is now at the top of its rising channel. Although it certainly could go higher from here (as it did in mid-2013), I would be looking to take some or all of my profits off the table at this point. Aggressive traders might even want to sell TLT calls or scale into a short position if the price continues to rise above the channel line.

These bonds have done very well, doubling in value over the last three years – almost matching the performance of the Dow and S&P 500. But that rise has been a series of ups and downs, zig-zagging along an upward sloping channel. With the economy balanced on a knife-edge between inflation and deflation, the Fed ending it's QE program, and interest rates starting to rise, I think the most likely scenario is a continuation of that pattern: a return to the lower limit of the channel.

20 Year Treasury Bonds

WIth all the uncertainty in the world, from ISIS in the middle east to Ebola in Dallas, from riots in Hong Kong to Russian troops in the Ukraine, the US Dollar has been percieved as the safest haven, and its price (and the prices of US stocks and bonds) has been rising as investors seek a secure home for their capital. In fact, the USD is now about twice as valuable as its half-life curve suggests it should be.

USD vs Prediction

Could it go even higher? Of course it could! Does this mean that the half-life curve has outlived its usefulness – that we are now in a New Era where the USD will continue to rise in value, perhaps to pre-2000 or even pre-1933 prices? I sincerely doubt it. None of the fundamentals have changed… Debt is still sky-high and growing at a harrowing pace, and has to be serviced, requiring an ever expanding quantity of money. Even as some central banks reduce their rates of money creation, others are just beginning to crank up the presses to fight a perceived deflationary threat. All that uncertainty is not going away. And the next crisis, whatever form it may take, will probably shake the foundations of the fiat currency world and refocus attention on real money: gold.

Table of prices in gold for week ending 3-Oct-2014

PS – There are two new charts in our collection: Barron's Gold Mine Index (dating back to 1940) and prices of new Steinway Pianos (from 1900 to 2013). Check them out!

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This week, most asset categories were higher with coffee and crude oil making the biggest gains; the exceptions were copper and silver. Over the last month, currencies, bonds, and stocks (other than mining shares) were lower, while commodities were mixed. Government currencies are generally lower today than they were a year ago, especially the JPY and CAD, although the EUR gained slightly.  Over the last year, bitcoin, coffee and the S&P 500 were the largest gainers, while cotton and crude oil declined the most.

Gold stocks may be forming a "head and shoulders" bottom, but I would like to see a close above 6 g before becoming bullish, and a close above 6.5 g would be much more convincing. Silver, although higher than it was a year ago, continues to languish near 0.5 g/oz with no signs of recovery in sight.

TLT, the 20 year treasury bond fund, continues to trade in its rising channel, and seems to be holding above support at 2.6g (and above its 200 day moving average as well).

Table of prices in gold for week ending 18-Jul-2014

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This week had every single asset category showing a loss. The smallest drop was in the Canadian Dollar, while the largest drops were in coffee, down 9.0%, and gold stocks, off 3.9%. Meanwhile, the mainstream media has been full of articles trumpeting new all-time highs for the Dow Jones Industrials and the S&P 500 stocks. Of course, these are meaningless statements, as the dollars used to define these markets are heavily manipulated by the Federal Reserve. As the chart below shows, stocks in the real world are nowhere near new highs; in fact, despite a very good year in 2013, they are about 30% below their 2007 highs, and a whopping 70% down from their 2001 highs.

Dow Jones Industrial Average in USD and gold grams since 1997

In other news:

Despite a 2.1% drop this week, the Long bonds are still safely inside their rising channel. If you own TLT, I'd continue to hold it.

Gold stocks may be forming a "head and shoulders" bottom, but I would like to see a close above 6 g before becoming bullish, and a close above 6.5 g would be much more convincing. Silver continues to languish near its multi-year lows with no signs of recovery in sight.

Note that gold stocks and silver are the only asset classes that are lower now than they were a year ago. Their "rubber bands" are stretched really tight; when they begin to recover, they could go ballistic… but there is no telling how long that might take to happen, and it is entirely possible that they could go even lower before they begin their recoveries.

Table of prices in gold for week ending 9-May-2014

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This week's biggest winner was gold stocks, up 3.9%, followed by cotton and copper, which rose 2.9% and 2.2% respectively. The biggest drop was in Bitcoin, down 4.6%, followed by crude oil which lost 3.7%. Government currencies, stocks, and short term bonds were all down slightly for the week, while long term bonds gained 1.0%.

The silver fix was 0.459 g/oz on Thursday, a low not seen since August of 2010, but silver recovered on Friday to finish the week unchanged. I don't think silver has seen it's bottom yet. For the best silver market analysis I know of, visit the Monetary Metals website and read their post on Gold and Silver Speculation and the weekly Monetary Metals Supply and Demand Report.

Long bonds have bounced strongly off the lower margin of their trading channel, giving a nice profit to anyone who took my suggestion back in mid-March to go long TLT. There could still be more upside, but keep a trailing stop in place, just in case!

A quick comment on Bitcoin – although this week and the last month were not good for Bitcoin, it is still up 260% over the last year – far outperforming all other asset classes. Bitcoin's long term exponential uptrend line is currently at about 2.5g, so Bitcoin could lose 77% of it's value from here, and still be in a strong uptrend. My guess is still that we will see parity with gold by the end of 2015.

Table of prices in gold for week ending 25-Apr-2014

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This week the markets were almost all lower, with Japanese stocks, copper and crude oil seeing the largest declines. The only rising market was gold stocks, which managed a 2.7% gain.

Checking the charts, conventional equities are now heading into bear market territory, with the Dow and Nikkei closing the week solidly below their 200 day moving averages, while the S&P 500 bounces around right at its 200 dma.

Long bonds are trading at the lower margin of their up-trending channel – there may be a low risk speculation buying them here; if they stay true to form and bounce higher, the profits could be excellent,  but if they start to fall, make a hasty exit.

Gold stocks have been trading above their 200 day average for about a month now, and have tested it as support several times. They are starting to look very attractive as a speculation. Once they close above 6.5 grams, and retest that level as support, I will consider them to be in a bull market.

Bitcoin is trading sideways, performing a bit worse than the USD and EUR, but a bit better than the CAD for the week. Trading volumes have been falling the last two weeks and are now very light; I expect volatility to increase when that trend reverses.

Table of prices in gold for week ending 14-Mar-2014

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This week saw rallies in Coffee and Cotton, and a decline in Copper and long term bonds.

Bitcoin continues to hold at a fairly high level despite the failure of Mt Gox, once the largest Bitcoin exchange, but recently marginalized by problems with withdrawals of bitcoins and government currencies. It will be interesting to see what the underlying causes of these difficulties turn out to be – fraud, technical difficulties, hacker attacks, or something else entirely. In the meantime, the rest of the world's exchanges continue to operate smoothly. One of the key advantages of Bitcoin is that the users act as their own banks: there is no need to trust third parties to hold your money! By keeping your funds in your own wallet, you eliminate the risk of a third part failure like that of Mt. Gox.

I haven't seen anything that changes my opinion that one BTC will buy at least one ounce of gold by the end of 2015.  As I have mentioned before, Bitcoin could fall a long way from these levels and still be in an exponential uptrend; but it is also true that it is highly speculative as an investment. So have fun with it, use it in everyday transactions (which is getting easier every day!) and don't let it become too large a position in your overall portfolio.

Table of prices in gold for week ending 7-Mar-2014

Filed under Banking, Bitcoin, Bonds, Coffee, Commodities by  #

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Over the last week, and over the last month, assets have followed the same basic pattern: stocks mostly higher and currencies, bonds, and commodities mostly lower.  Bitcoin has been the biggest winner by far, rising 29% in the last week and 179% over the last month. In addition to the fast rising price, global trading patterns are shifting as well. Read more below.

The JPY was was the weakest currency, falling 1.2% over the last week and 2.7% over the last month, followed by the CAD which lost 0.6% this week and 2.5% over the last month. The USD fared the best, declining only 0.1% this week, and 1.3% for the last month. The dollar closed at 24.2 mg, and sits 62.7% above its half-life curve. In the last few days the USD has shown some renewed strength, and on Wednesday set a new record high of 67% above the price predicted by the half-life curve.

Bonds were mostly lower, with the short term SHY dropping 0.1% for the week and 1.1% for the month. The long term TLT recovered 1.1% this week, but still fell 0.9% over the last month, performing considerably better than the underlying dollar. TLT continues to struggle with resistance between 2.5 and 2.55 grams.

Stocks were mostly higher, except for the HUI Gold Bugs Index, which fell 1.2% this week, but still managed to gain 2.0% over the last month. At 5.48 g, the HUI is 5.6% above it's recent lows, but well below both its 200 day moving average, and its long term overhead resistance at about 6.5 g.

For the last week, stocks on Japan's Nikkei Index rose the most, adding 6.3%, while the S&P 500 and Dow gained 1.4% and 1.1% respectively. Over the last month, however, the picture reverses, with the S&P gaining 4.5% while the Nikkei advanced just 2.2%. The S&P and Dow appear to be breaking out to new multi-year highs, while the Nikkei is just below it's overhead resistance at 3.68 g.

Commodities were mixed, led by coffee in both directions! For the week, coffee was the biggest gainer, rising 1.5%, but for the last month, it was the biggest loser, falling a whopping 10.4%.  Platinum gained 3.4% over the last month, but lost 0.7% this week to close at 34.7 g, now 8.2% above gold parity. Silver was down 5.0% this week, but is only 0.6% lower for the month, closing at 0.50 g/oz.

As mentioned above, Bitcoin has been exploding in price over the last month. It has also been internationalizing, especially in Asia. 31% of all exchanges between BTC and government-backed currencies now take place in China, in CNY. The world's largest single bitcoin exchange is now BTCChina.com, based in Shanghai. Although still smaller than all the USD exchanges combined, BTC China offers the highest prices for bitcoins, and its customer base is growing fast.

There are several reasons that this makes sense. First, the Renminbi is not generally available for foreigners to hold. So for those outside China, holding bitcoins in a BTC China account allows them to get exposure to the CNY. And for those inside China, Bitcoin makes it possible (and even easy!) to use their CNY to purchase goods and services abroad, over the internet or when traveling, and allows them to get exposure to USD, EUR, and other foreign currencies.

I think this all bodes well for Bitcoin. Where Mt. Gox once handled 80% of all BTC currency exchange, it now handles about 24%. Where once almost all exchanges were in USD, they are now spreading out into EUR and CNY as well. There are many more options to buy and sell gold with bitcoins, as well. And spreads are getting smaller as these markets become more liquid.

In the long run, Bitcoin's price is really driven by adoption rate. As bticoins become more useful to more people, and as their turnover rate increases (the "velocity of money" increases) their value relative to other currencies, including gold, increases.

Since its inception, Bitcoin has shown an exponential growth in value. Because of this, linear charts have a hard time capturing what is happening; prices just shoot up off the chart, appear to swing wildly, and the early years appear to be a long flat line hovering just above zero. For these reasons, I prefer a logarithmic chart like the one below.

There are four lines on this chart. the green represents the value of the USD, the heavy blue represents BTC, the light gray uptrend line shows the general trend for Bitcoin's price, and the horizontal yellow line shows the price of one troy ounce of gold (31.105 grams, or 31,105 mg). Bitcoin finished last week at about 1/3 of an ounce, and currently trades at about 1/2 of an ounce (a bit more in China, 18.9 g, a bit less on Bitstamp, 15.0 g). All this is after the big "spike and crash" on Tuesday the 19th, when BTC was trading as high as 22 g in the US, and 28 g in China.

So we are now knocking on the door of 1 BTC = 1 ounce of gold.

But to actually get there may take some time. the uptrend line I have drawn means that Bitcoin's value increases ten-fold about every 6 quarters. In mid-2012, the value was about 100 mg, so I would expect the value to be stably above 1,000 mg (1 g) by the end of 2013. And another year and a half should see the price stably above 10 g if the uptrend continues. Only 6 months later, at the end of 2015, the price should be stably above 31.1 g, or one ounce of gold.

We are currently well over 10,000 mg. So the BTC price could fall by 90% from here and still be well above the exponential uptrend line. Or the price could move sideways for more than a year and still be above the trend line. Of course, it is also possible that the price could continue to rise rapidly and achieve the one ounce target in a matter of weeks or months, rather than years.

The point is that unless something derails this freight train of widening adoption and increasing utility, I think that 1 BTC buying 1 ounce of gold  by the end of 2015 is baked in the cake. Note that there is no reason it should stop there, but I think that will be a major psychological milestone.

BTC in gold

Bitcoin is still a highly speculative investment. There are many hurdles to overcome – technical, social and legal, before the free market internet currency becomes mainstream. Any one of these could slam the project so hard that bitcoins would essentially lose all of their value.  But every day that passes, and with every new user, and every new shop and site that accepts bitcoins, the risks decline and Bitcoin's value is enhanced.

I apologize for the lack of regular posts to the site over the last few weeks. My family has been traveling, and just keeping the charts up to date has been all I could handle. Now we are settled in Argentina for a few months, and I hope to return to a more regular schedule.

On December 7 & 8, I will be attending the Latin American Bitcoin Conference in Buenos Aires. It looks like it will be an outstanding chance to meet many of the leaders of the free market money revolution, along with many Bitcoin developers and entrepreneurs from around the world. If you will be attending, please drop me an email and I would love to get together.

Table of prices in gold for week ending 15-Nov-2013

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Markets were almost all higher this week, with only the HUI gold stocks losing ground. Bitcoin and the Japanese Nikkei stocks gained more than any other asset classes. The USD and JPY the strongest of the government-issued currencies. On Friday I was a guest on Power Trading Radio with John O'Donnell. We talk about stocks, housing, income, and discuss our forecasts for the price of gold. Check it out!

Bitcoin, the free market internet currency, rose 8.0% to 3.5 g, the highest level seen since the all-time high back in April. Volume on Mt. Gox was low, only 25 kg; see my remarks below for more on this. The USD rose 3.5%, with the dollar closing at 24.6 mg, now 62.8% above its half-life curve.  The JPY was up 3.2%, while the CAD and the Euro each gained 2.8%.

Bonds moved higher, with the short term SHY rising 3.4% while the long term TLT added 3.3%. Note that neither bond gained as much as USD cash, and that shorter maturity was stronger than the longer one. For most of the week, TLT's advance was blocked by resistance at the 2.52 g level; but on Friday, the USD's super-strength pushed TLT over the top to close at 2.59 g (just under the bottom of the old rising channel) . Watch closely next week to see if this is a real breakout, with 2.52 g becoming the new support, or merely a fake-out.

Stocks mostly rose even more than bonds, led by Japan's Nikkei Industrials, which advanced 6.0%. The Dow Jones Industrials gained 4.6%, and the S&P 500 rose 4.3%. The HUI Gold Bugs Index was the week's lone decliner, falling to a new 22 year low of 5.13 g on Tuesday before recovering to close down 0.9% at 5.21 g.

HUI Gold Stocks

Commodities were all higher, led by coffee, which advanced 5.6%. Silver added 2.9% to finish the week at 0.529 g per ounce.  Platinum gained 2.2% to close at 33.6 g, now 8.2% above gold parity. Copper was up 2.6%, while crude oil rose 1.7% to close at 2.5 g/bbl.

Earlier I mentioned that Bitcoin trading volume on Mt. Gox was light this week. This trend as been bothering me, and I recently began to investigate how trading is evolving across the various exchanges. Bitcoincharts.com lists 39 USD exchanges, but most of these are not currently active, and only three of them, Mt. Gox, Bitstamp, and BTC-e, account for virtually all of the USD trading volume.  

Prior to April of this year, a chart of the weighted average of the three top exchanges was almost identical to a chart of Mt. Gox, because over 80% of the trading occurred there, and prices on the other exchanges tended to follow Mt. Gox prices pretty closely.

After April's wild swings, however, things began to change. The price differential widened, and the percentage of trading volume on Mt Gox has gradually declined. As I mentioned, prior to April, it was rare to see a day when Mt Gox was handling less than 80% of the trading volume. By August and September, this was down to around 50%, and so far in October, it has fallen as low as 20%, and for the last week has averaged 38%.

So while average daily trading volume on Mt Gox was only 25 kg, total trading volume averaged about 62 kg per day.

To track this situation, I have added a third chart to the BTC page showing the difference between the Mt Gox price and the weighted average of Bitstamp and BTC-e prices, and tracking the percentage of total volume handled by Mt. Gox. (Note that the "1,000" mark on the right scale serves as "100%" for the yellow volume percentage graph.)

BTC-USD Exchanges

Table of prices in gold for week ending 11-Oct-2013

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Reader Daniel P wrote in a recent comment on the Half-Life of the US Dollar page:

Dear Sir Charles, thank you for an exciting and informative site it is much appreciated.

When was the last time the USD moved +60% above the trend line (are there similarities to the big jump just before dot.com crash in 2000?), and should we expect a corresponding deviation to -60% as a correlation to the upward move? Would this mean we could expect a gold price of around $2,800-3,000 when the USD reverses to -60% below the expected trend line?

I think you your idea and concept of the “Half-Life of the US Dollar” is a very smart and a useful indicator for the predicted trend of the USD. It would be interesting to see the graph in more detail for example where it follows your “The US Dollar since 2006” graph? Any thoughts on how I can make my own “Half-Life of the US Dollar” graph?

Best regards,
Daniel P

Daniel raises some very important points. My theory is that the Fed made decisions and took actions after the tech-bubble crash that started them on the path they have been pursuing since. This path involves devaluing the USD at a relatively steady rate of decay.

Someday they will choose (or be forced) to abandon this policy, or the public will come to distrust the Dollar so much that it will lose most or all of its value. At that point, the half-life curve will be obsolete. So even though I chart it out over decades to come, I don’t really think that it will play out that way – the curve just shows roughly what to expect if the policies and actions, and the market’s response to them, continue as they have over the last decade or so.

Does this big deviation from the curve mean that the policies are at an end, that the half-life curve is now obsolete, and that a new era of USD strength is beginning? Maybe, but I doubt it – based on the fundamentals of debt levels, Fed policy statements, and the way the US Empire is tracking the demise of every earlier empire in history, I expect we will see the decline stretch out over many years, if not decades.

My guess is that the current large positive deviation will be followed fairly shortly (over the next year perhaps?) by a large negative deviation. To actually reach -60% deviation by the end of 2014, the USD would have to fall from its current lofty level of 24.5 mg to its predicted value of around 14 mg, and then fall 60% further to about 5 mg.  That's a HUGE swing, implying a USD price for gold in excess of $6,500/oz. Unless there is an abrupt loss of confidence in the Dollar, I doubt we would see that in one straight decline; much more likely, to reach that level we would have a series of declines and rallies over several years. The half-life curve suggest that we should see $6,500 gold during 2020.

A more typical level of "undershoot" for the USD would be 10 to 20% (10 to 11 mg), implying a gold price between $2,800 and $3,200 by the end of 2014.

As Niels Bohr observed, "Prediction is very difficult, especially if it's about the future." And that goes double for gold prices! But until we see a dramatic shrinkage in the size of governments and their spending habits, a return to sound free-market economics and sound money, I think it is safe to say that the trend for fiat currency values will, in spite of occasional updrafts, be down.

PS – to make your own half-life curve, just import gold prices into a spreadsheet, divide 31.1035 by each gold price to get a price for the dollar, and run a logarithmic curve-fit function on the data points (in my spreadsheet, it's an array function called LOGEST).