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?
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).