Global Gold 3
Adam Hamilton
Archives
Jul 9, 2007
As American investors and speculators
in precious metals and their miners, it is really easy to lapse
into a provincial perspective. Although the American PM markets
are certainly very important, there is a massive world out there
beyond our country. The entire populace of the United States
represents less than 5% of the world's people, and a similar
tiny fraction of potential investors.
We Americans have been incredibly
blessed with unparalleled per-capita wealth, and it is great
to see other nations around the world thriving economically too.
In any country more free enterprise ultimately leads to better
standards of living and more surplus capital to invest. Some
of this capital will certainly find its way into gold, the ultimate
long-term investment throughout human history.
And even though per-capita
levels of investment outside the US generally remain small by
American standards, since those living outside the US outnumber
Americans by over 22 to 1 they will collectively have a huge
impact in the world markets. So it is important for us to try
to understand how gold is perceived outside of the United States.
As every speculator knows,
it is price action that shapes perspective. When prices are high
and rising, people get excited and want to deploy more capital.
When prices are low and falling, people get bored or scared and
walk away in disgust. So by viewing gold through the lenses of
major local currencies worldwide, we can get a good idea of how
locals are likely to perceive it and whether they are likely
to buy or sell.
In this essay
series, I have been using ten major currencies to track gold's
bull-to-date progress. They span every populated continent and
encompass how the vast majority of the world's population views
gold. Some currencies are obvious choices, like China's and India's
since they represent such huge populations. Other currencies,
like Brazil's and South Africa's, were chosen because they are
leading regional currencies on their respective continents.
In years past these charts
have covered the entire gold bull to date, but this time I zoomed
in to the last two-and-a-half years to increase our resolution
on current technicals. If you would still like to see the original
full-bull versions, our newsletter subscribers can access these
high-resolution charts covering this entire bull in the private
Subscriber
Charts section of our website.
These charts also have a few
peculiarities of which you should be aware. First, the gold prices
are forex-implied, they are not true local gold quotes. Unfortunately
actual local gold-price histories from around the world are notoriously
difficult to find. Thankfully they are not necessary though due
to the way the gold markets trade around the world today.
Since the US dollar has been
the world's reserve currency for decades now, the dollar gold
price still dominates world gold trading for the time being.
Virtually everywhere on the planet, the local gold price is still
a function of the dollar gold price and the exchange rate between
the local currency and the dollar. These forex-implied gold prices
are not perfect, but in my experience they're very close. Periodically
over the last six years I have spot-checked true local prices
with forex-implied prices and found them well within 1% of each
other.
Second, in all these charts
a rising red currency-exchange-rate line means that the local
currency is gaining in value against the US dollar. A falling
currency line means it is losing value against the dollar. In
order to make all these charts consistent, in some cases I had
to use the inverse of customary currency quotations. For example,
the Japanese yen is always quoted in yen per dollar. But if charted
this way, a rising yen would mean a falling chart line. This
is counterintuitive, so I changed all exchange rates to the dollar
cost per local unit of currency.
Finally, all gold prices are
in local currency per troy ounce, even if this is not the local
custom. Gold in Asia, for example, is typically quoted in price
per gram on local exchanges. But in the West we are used to seeing
gold prices quoted in troy ounces. In order to keep all these
prices and charts consistent and comparable, all gold prices
are rendered in local currency units per troy ounce regardless
of custom.
After building all these charts
to examine global gold technicals since 2005, some common themes
emerged that you should keep in mind while you look at these
charts. First, gold enjoyed a massive upleg from mid-2005 to
mid-2006, the mightiest of this bull market by far. Since this
upleg culminated in the major interim highs of May 2006, gold
has been consolidating in tightening wedges between support and
resistance all over the world.
While this long consolidation
has certainly tested the patience and commitment of PM traders,
it is really very bullish. Across the globe gold is now trading
at high levels that would have been considered a nearly impossible
dream only a couple years ago. But today these same high levels,
since we have seen them for over a year now, seem routine and
boring! This consolidation is acclimatizing traders around the
globe to considering today's prices as normal. It is building
a rock-solid base from which the next major upleg will soar heavenwards.
As these wedge-shaped consolidations
all over the world tighten, gold will soon have to break out
one way or the other. With its fundamentals
still remaining so bullish, and it suffering through such negative
sentiment today, the odds heavily favor this breakout happening
to the upside. So as you digest these charts, look at the parallels
between gold in these major currencies and realize the high consolidations
are forming new bases to support gold's next big upleg.
Since the US dollar gold price
still dominates the global gold market for the time being, this
is the reference chart off of which all others should be compared.
From February 2005 to May 2006, gold soared a breathtaking 75%
in dollar terms. This was an awesome upleg, but as it matured
sentiment became irrationally exuberant so a correction was necessary and expected.
Over the 14 months since, the consolidation has done its job
of crushing euphoria and gradually shaking weak hands out of
this market.
Although even American gold
enthusiasts are generally despairing and negative today, this
chart is really impressive. Gold has been climbing higher on
balance since early 2006 as its rising support line shows. Resistance
is descending to create a consolidation wedge, but this is only
because of May 2006's euphoric surge. If that short-lived surge
is erased, gold would actually be within a nice uptrend channel
today.
In any case, the highest-probability-for-success
time to buy any asset within a secular bull is when its price
temporarily falls back down to its 200-day moving average and
support. Today gold is in just such a bullish place. It is from
situations like today's, where gold is unloved and languishing
low technically, that mighty uplegs launch. Note above that gold
traded sideways throughout most of 2005, consolidating like today,
before it soared in its biggest upleg of this bull. Consolidations
precede big uplegs.
Finally, note the US Dollar
Index here, the red line. Since late 2005 the dollar's secular
bear market has reasserted itself and dragged the dollar down
another 12%. The dollar is so low today that it is within spitting
distance of hitting new multi-decade
all-time lows! And since there are few things better for
gold than a loss of faith in major fiat currencies, the USDX
tracking under 80 should lead to a major boost in global gold
investment demand.
The Canadian dollar is thriving
on the relentless US dollar weakness. Just this week, it came
within a penny of hitting a 30-year high versus the ailing US
dollar! Although the strengthening Canadian dollar ate up some
of the gains in US-dollar gold, Canada gold is still up 56% since
early 2005. Provocatively it just made a new high back in late
February of this year that even slightly exceeded its May 2006
high. So Canadian gold investors haven't had to wait as long
for new bull-to-date gold highs as the rest of the world.
Despite the wild currency fluctuations,
the same key technical pattern is readily evident in Canada gold.
It has been consolidating sideways for over a year now, its rising
support creating a wedge. This is getting Canadian gold investors
comfortable with the idea of C$700 to C$800 gold being the new
normal range. It is from this base created by this consolidation
that the next major gold upleg will launch. And with Canada gold
at its support and under its 200dma, it is a great time for Canadians
to buy gold.
Brazil's currency has soared
over the last couple years, up an incredible 46% against the
US dollar. This has certainly neutralized some of dollar gold's
gains, but real gold has still had an awesome 55% run. Brazil
gold has been coiling in a tightening wedge too, and intriguingly
it is the only one of these currencies where gold has apparently
broken out to the downside. A recent surge in the Brazilian real
drove gold lower under support. But I suspect this downside gold
action will be short-lived, as the overdue global gold rally
will quickly push Brazil gold back up into its wedge.
The gains in euro gold over
the last couple years have been amazing, 76%! Since the euro-block
countries contain around 8% of the world's population, and since
European investors are so wealthy in a per-capita sense compared
to most of the world, and since Europeans have long had a solid
cultural affinity for gold, I think this euro gold price is extremely
important. When euro gold breaks out of its wedge and powers
higher, European investors could really accelerate this upleg
as they chase gold.
While euro gold is down under
its 200dma and at its support today, the narrowing mouth of its
consolidation wedge is the tightest out of all these currencies.
This means that euro gold will have to break out soon, one way
or the other. Just like euro gold finally breaking
€350 back in June 2005 announced the birth of the much
more powerful Stage Two gold bull, it could again be a euro gold
breakout above this wedge that triggers enough European buying
to ignite the next major upleg.
With the euro itself near an
all-time high against the US dollar, Europeans are going to be
getting more and more nervous about their US investments. Currency
losses can quickly crush any gains achieved overseas. What better
place than gold to park capital if fears of big dollar losses
and new all-time lows start to grow in popularity.
Interestingly UK gold is in
a very similar position to euro gold. While the pound has soared
18% versus the dollar since late 2005, UK gold still managed
a massive 73% run higher between early 2005 to mid-2006. The
same currency-crisis dynamics should affect British investor
thinking too, as the pound just made a 26-year high versus the
US dollar. If British investors see further gains in the pound,
they are going to be less comfortable owning US stocks and bonds
and may start buying gold instead.
All these multi-decade currency
highs relative to the dollar ought to frighten the US Fed and
Washington. Fiat-paper currency is a very fragile thing based
on nothing but faith in the issuing government. It is quite literally
a confidence game. If the Fed keeps printing money like there
is no tomorrow and the dollar keeps falling to new all-time lows,
it really could create a crisis of confidence in which gold will
thrive.
If the US Fed wants lessons
on how to utterly destroy a currency, it can look to Japan. Despite
the latest downleg in the secular US dollar bear, the Bank of
Japan still managed to create an impressive 18% loss in the yen
relative to the dollar. It's a race to worthlessness! Naturally
this has made gold look exceptionally strong in Japan, up 92%
since early 2005. And yen gold just made its latest bull-to-date
high in mid-April. While it has indeed been consolidating, the
eroding yen has created a rising wedge in Japan gold.
Japan is destroying its own
currency through irrationally low interest rates and excessive
money-supply growth in order to subsidize its export industry.
This is incredibly stupid. Free markets only thrive when monetary
policy doesn't play favorites between savers and debtors. Since
savers are getting slaughtered in Japan, more and more are flocking
to the immutable stability of gold. The spark that ignites the
next global gold upleg could very well prove to be Japanese investors
starting a heavier migration into gold to protect their enormous
savings.
As a student of the markets,
I find this China gold chart the most intriguing of all. For
a decade or so ending in July 2005, the yuan was pegged to the
US dollar. So up until this point the yuan gold bull was a perfect
mirror of the dollar gold bull. But since the yuan was quasi-freed
to float a bit, it is up 9%. This strength is eroding some of
dollar gold's gains in yuan terms, but yuan gold still shot 69%
higher in its last major upleg. It is also at support and under
its 200dma today, the ideal time to buy technically.
China is especially interesting
today in gold terms because its stock-market bubble is imploding,
mirroring the early
NASDAQ bust in 2000 remarkably well. In the West when investors
face a stock bubble bursting, some flock to gold as a safe haven
of protection from the turbulent stock markets. And since the
Chinese have a much deeper cultural affinity for gold than we
Americans will ever have, I suspect they will pile into gold
once their accelerating stock slide starts really scaring them.
If this happens, overall global
gold investment demand will really start growing. The Chinese
investors sure aren't rich by American standards, but there are
so many of them that the capital they collectively control is
massive. Coincidentally, the Shanghai Gold Exchange is launching
a new gold-trading service for individual investors that will
make it far easier for Chinese investors to buy and keep physical
gold. And with China
gold's technicals looking gorgeous regardless of stock-market
action, Chinese gold demand should really start to grow and help
drive up world gold prices.
While the Chinese have liked
gold forever, I don't think anyone loves it more than the Indians.
Gold is such a huge part of Indian culture that it is probably
the world's biggest growth market for gold investment demand.
And with India gold up 80% in the last major upleg, Indian investors
are paying attention. Rupee gold is also in a wedge, and it is
tightening just like the other wedges and will soon break out.
If the Americans, or Europeans, or Japanese, or Chinese start
buying, rupee gold will soar in short order.
And interestingly Indian wedding
season is approaching at the end of summer, after the harvest.
Gold is a huge part of these marriage rituals as wealth in the
form of dowries is often converted into beautiful gold jewelry
for the brides. While in the States we tend to separate jewelry
gold from investment gold, in India jewelry often serves as investment.
With Indian gold demand on the verge of its usual seasonal surge
and looking very bullish technically under its 200dma, Indian
investors will be buying gold too.
Since the Aussie dollar has
been so strong over the past year or so, the Australia gold wedge
is much flatter than most other countries' wedges. With a dead-flat
support line around A$760, Australians have had a tougher time
psychologically in this consolidation than Americans. At least
our support line has been rising which is a subtle confirmation
of bullish underlying technicals. But this weakness has made
gold an even better buy in Australia in technical terms than
it is in much of the rest of the world.
And Australian investors are
much more likely to buy gold than American investors. It is just
more accepted down under since such a big fraction of Australia's
economy and exports is driven by the natural-resources industry.
So despite the flat Australia gold support, the necessary gains
to drive renewed interest in investing in gold won't need to
be as great as in the States where gold is still largely reviled
by the mainstream.
Finally I'd like to close with
South Africa, which has the strongest currency on a continent
full of incredible inflation and fiat-currency destruction. Yet
despite South Africa's relative strength and natural-resource-intensive
economy, its Marxist government has somehow managed to drive
the rand even lower versus the falling dollar. This certainly
isn't easy, as only the Japanese government has had similar success
in debasing its own currency.
Because of these ongoing rand
problems, the 103% gain in rand gold since early 2005 is the
best of all these major currencies. While Africa's investment
community is not very large, it naturally gravitates to gold
since the continent's fiat currencies are such a mess. Right
now South African investors have a rare opportunity to buy gold
under its 200dma and at support, the best time within a secular
bull.
Once again with these ten charts
digested, major themes exist in gold that are common all over
the world. Gold soared in a massive upleg ending in mid-2006.
Since then gold has been consolidating, generally grinding sideways.
This consolidation has gutted sentiment and made traders really
negative on gold, but it is really quite bullish. It has convinced
traders that today's gold prices are the new norm, so once they
start buying again gold will launch much higher from here.
Within any secular bull driven
by a continuing worldwide supply-and-demand deficit, the very
best times to buy in probability terms are just like today. Prices
fall under their 200dmas and down to support, and sentiment remains
pretty bearish since there haven't been any serious price gains
in some time to attract in the momentum-seeking bulls. All over
the world today we are seeing this, great gold prices in technical
terms coupled with lackluster sentiment that cannot persist.
At Zeal we are unrepentant
hardcore contrarians. We add new long positions when others don't
want to, when they are paralyzed by fear or worries. With pessimism
in the entire PM realm at such irrational
highs today, it seems we aren't too far from extremes of
fear. Just as markets abhor extremes of greed at major tops,
they don't allow fear extremes to last too long either. Instead
a major rally happens to obliterate the fear.
All over the world, gold looks
like it is on the very verge of such a major rally. Odds are
it will turn out to be a major or perhaps even massive upleg.
As always, gold's renewed strength will spill over into silver
and the precious-metals miners. We've been aggressively buying
elite gold and silver miners in recent months in order to lay
in positions ahead of this highly-probable new upleg. Subscribe
today to our acclaimed monthly newsletter and mirror our trades
before this exceptional buying opportunity ends when gold explodes
higher!
The bottom line is all over
the world as these charts revealed, gold appears to be near the
end of maturing consolidations. It won't take much buying to
break gold free from its tightening consolidation wedges and
then technically-oriented traders will pour in and drive it higher.
And since gold's fundamentals remain awesomely
bullish, the wedge breakouts should indeed occur to the upside.
Mined supply and even central-bank sales just cannot keep pace
with relentlessly rising investment demand worldwide.
All around the globe, investors
have great technical reasons to add new long positions in the
precious-metals realm right now. Sooner or later, just as in
2005, this new buying will reach critical mass and gold will
soar again. Today's irrational fears will rapidly evaporate and
we'll be off to the races in gold's next major upleg.
Adam Hamilton, CPA
Jul 6, 2007
Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
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