 Euro Gold Stealth
Bull
Adam Hamilton
Archives
July 31, 2004
While the relentless gold
bull market in US dollar terms continues to help American
contrarians grow wealthy, this same gold story looks very different
when viewed from outside of the States.
Gold's performance in other
major currencies in recent years has lagged that of dollar gold
dramatically. In fact, the vast majority of foreign investors
I talk with these days still tend to view our American gold bull
as little more than a dollar bear.
Since gold is the ultimate
form of money, it directly competes with all the fiat-paper currencies
dominating the world today. The price of gold denominated in
any particular fiat currency, including the US dollar, is actually
the current gold exchange rate with that currency. As the US
dollar bear of recent years accelerated, the dollar/gold
exchange rate has naturally surged higher.
Now this resulting higher dollar/gold
exchange rate, or gold price, has been a windfall for American
contrarians. Bull-to-date dollar gold is up about 66% since April
2001, while the unhedged HUI gold-stock index has rocketed up
by 614% so far! Whether you are an American or not, you can certainly
understand why we are so excited about this gold bull in the
States.
But from a non-dollar-centric
perspective, gold's performance has been fairly lackluster in
recent years. Since the US dollar has continued to dominate world
trade throughout this gold-bull period, the dollar weakness has
translated directly into local strength for major competing currencies
like the euro
and yen. Thus the gains in other currencies have effectively
offset most of the gains in dollar gold in local terms for foreign
investors.
This phenomenon is largely
due to the peculiar idiosyncrasies of having a world gold market
almost exclusively denominated in dollars. Gold is bought and
sold in every local currency in the world, but these local prices
depend heavily on the local/dollar exchange rate and the dollar/gold
exchange rate. I realize that eyes start to glaze over whenever
exchange rates rear their ugly heads, so this is best understood
with an example.
Imagine you had been traveling
in Europe in late 2001, and you wanted to pick up a European-minted
one-ounce gold coin as a cool souvenir. At the time gold was
trading around US$275 in the States. It was also a great time
for Americans to head to Europe as the new euro was struggling.
It only took US$0.90 or so back then to purchase a euro. In euro
gold terms, you would have been quoted a gold price in Europe
near €305 an ounce.
So to buy your gold coin, you
would first have to purchase the 305 euros. At $0.90 each, they
would cost US$275. So your effective price for your European
gold coin would have run about $275 in late 2001, not too far
from the US dollar price in New York. While small fluctuations
of a couple percent around this dollar gold price are common
in local-currency terms around the world, they always eventually
revert back to the dollar gold price expressed in the local currency
via the local/dollar exchange rate.
Now imagine you are heading
back to Europe today, and would like another beautiful European
gold coin for your collection. If you meander into a local coin
shop you will be quoted a euro gold price around €325 these
days, only 7% higher than 3 years ago. But in these intervening
few years, the dollar has plunged against the euro and all other
non-pegged currencies. Today it takes a whopping US$1.25 or so
to buy each euro, so they cost 39% more from an American perspective
due to the dollar's relentless decline.
If you buy the necessary 325
euros in order to purchase your coin, they will cost you US$406
or so. Not surprisingly, this gold price is not far away from
the current dollar gold price in the States. While gold rallied
dramatically in the US in recent years, in other currencies it
has not. The greatest gold bull in the world today has only impressively
manifested itself in the States and in countries that peg their
local currencies to the US dollar.
I realize that you currency-savvy
European investors read this example and can't believe I am wasting
paragraphs on it, but for Americans born and raised in a dollar
world this crucial concept can be elusive to grasp. It is very
challenging for us Americans to think in non-dollar terms since
that is all we have ever known. We Americans have to realize
this crucial gold-bull fact
Gold is up in the US in recent
years primarily because of the US dollar bear. Just as the euro
rises when the dollar weakens, so has the ultimate currency known
as gold also marched higher.
From a European investor's
perspective, this gold bull we rave about in the US is little
more than a bear market in the US dollar that caused the dollar/gold
and dollar/euro exchange rates to rise, nothing more. Thus, it
is not surprising that non-American investors generally tend
to be dismissive of this gold bull. This is totally understandable
of course. Imagine how little we Americans would care about this
gold bull if it were only happening in China, for example, while
our own local dollar-gold price remained flat.
Interestingly however, even
though foreign investors remain largely indifferent there is
a subtle stealth bull in gold already underway in other major
currencies! Major support lines with modest uptrends are being
gradually formed in local gold markets around the world with
each passing day's new data. A series of higher lows is the single
most important technical ingredient for bull markets.
In this essay we are using
the euro as a proxy for other major currencies, since it is currently
the currency most likely to continue eroding the dollar's long-standing
hegemony in international trade. As you digest these charts,
realize that gold in most other local currencies, as long as
they are not pegged to the US dollar, would have similar technical
trends.
The subtle rising action shown
in these euro-gold charts is very exciting as it may mark the
early years of a true currency-transcendent global gold bull.
The implications of this development are enormous for all investors
worldwide, regardless of which country you consider home.
Now if our current gold bull
was exclusively a dollar phenomenon, then gold in other currency
terms ought to be dead flat. Yet, as you can see above the lower
support lines for euro gold are moving higher. Gold in euros,
and indeed gold in most other currencies, is methodically carving
a series of higher lows that looks like the early stages of a
major bull market!
The first support line to consider
is the blue one, that of euro gold itself. It already has several
intercept episodes over many years, so it is rock solid. In addition
it has never been decisively broken to this point in time. While
euro gold sure isn't up 66% bull to date like dollar gold yet,
it does have a modest uptrend reminiscent of a stealth bull market.
Originally around €275
in early 2001, the primary long-term euro-gold support line is
almost up to €325 these days. This is a non-trivial 18%
gain that is well outside of the probability of being random.
Gold is slowly yet relentlessly marching higher in euro and other
currency terms even though most of its US action has been due
to the dollar bear market.
A second support line is drawn
above in black for euro gold's crucial 200-day moving average.
This long-term trend line also has a modest upslope. 200dmas
are very important as they usually run dead parallel with the
primary trend of any price data. The fact that euro gold's 200dma
is also meandering higher over years confirms that this is a
real long-term uptrend and not some short-term technical aberration.
The rock-solid 200dmas are completely oblivious to short-term
noise and filter it all out to reveal true trends.
These technical uptrends, bull-market
signatures, drive stakes through the heart of the common foreign
notion that this gold bull is exclusively a dollar-bear phenomenon.
Yes, it is mostly a dollar-bear thing thus far, but the dollar's
weakness simply cannot account for all of the dollar-gold gains.
While the American gold bull is up 66% bull to date, the US dollar
bear is "only" down 30% in its own bear to date so
far in US Dollar Index terms.
The US Dollar Index is a basket
of currencies though, while these charts only show the dollar/euro
exchange rates. In pure dollar/euro terms, the euro has risen
53% in its bull to date against the US dollar, from each euro
costing less than US$0.84 in July 2001 to costing over US$1.28
in February 2004. Thus, the dollar/euro exchange rate could be
considered directly responsible for 4/5ths of dollar gold's action,
but that intriguingly leaves 1/5th that is not directly explainable
by the dollar's secular bear.
Before we get into this 1/5th
of the gold bull that has already transcended mere currency issues,
there is one more technical observation I would like to point
out. A lot of technicians see the top resistance line of euro
gold remaining extremely oppressive at €350 and because
it is straight assume that euro gold is flatlined. For a variety
of reasons however, it is not usually productive to measure any
bull market exclusively by its seeming inability to break above
old interim highs at the moment.
For example, in November 1980
the CRB
Commodities Index hit an all-time high just under 335. That
stellar high has yet to be exceeded even to this day. If we were
to draw a top resistance line on the CRB chart, it would start
at 335 and descend in a bearish fashion. If we considered this
heavy top resistance line alone in isolation it would be really
easy to assume that commodities were a poor investment in the
25 years since.
But, in reality, there have
been about five separate multi-year bull markets in commodities
since 1980 that have each earned fortunes for astute speculators!
The inability to break above an old high does not necessarily
condemn an investment to the parched sands of eternal bear-market
exile. While euro gold hasn't broken above €350 yet, it
is in a definite uptrend and profits are being earned by buying
it whenever it is near its lower support line like today.
Back to the part of this gold
bull unexplainable by mere currency issues, I am really excited
about this insight as I think we are witnessing the early signs
of a renaissance in true global investment demand for gold. Great
Bulls in gold are never driven by normal industrial demand, but
by new marginal investment demand. When investors aren't interested
in gold there is nothing that can make it materially rise, but
when investors grow interested in gold there is nothing that
can hold it back. Not even the scourge of central banks.
Every gold bull in modern
history consists of two or three stages. In the first stage,
gold rises merely because other currencies fall (often due to
excessive fiat inflation) and hence its exchange rate goes up.
I believe we are nearing the end of the first stage in our current
gold bull today. With 4/5th of our dollar-gold bull to date directly
attributable to currency issues in the past few years, we have
already paid our dues in this early currency stage.
The second stage witnesses
gold decoupling from the usual exchange rates on pure investment
demand. The modest gold rises in the first stage, even though
largely offset by currency movements, inevitably attract in the
early contrarians who perceive a major secular trend change early.
They start buying gold as an investment. Gradually their buying
pushes the gold prices up high enough that the Ancient Metal
of Kings rallies in all currencies. After a year or two of stage-two
rises, general investors follow the contrarians' lead into gold
and push it even higher.
Some gold bulls end after stage
two, but if the general public gets involved then stage three
ignites. There is no rush like a gold rush, and a speculative
mania in gold kindles an inferno of popular greed that even exceeds
that of the late 1990s tech mania. All of us humans have a natural
affinity for the beautiful yellow metal buried deep somewhere
in our hearts, and when gold lust is sparked on a large scale
vast sums of money start deluging into a very small market. Gold
shoots vertical into a bubble before finally collapsing after
it has sucked in enough capital.
If you were to graph these
three stages of a gold bull, they would look like a parabola
rising to the right. The first currency stage is a modestly rising
line over a few years, like the euro-gold line above, nothing
too impressive. The second investment stage witnesses a dramatic
acceleration in gold's upslope and gains that dwarf the early
currency years. Finally the third mania stage is when the parabola
turns vertical in the final months or year leading into a blistering
bubble top and subsequent crash.
If you imagine a parabolic
price graph, think NASDAQ
2000, you know that the vast majority of the gains happen
in the second and third stages of the parabola. This means that
all of our stage-one gains to date, as magnificent as they have
been, are probably only a small foretaste of the feast to come!
While the divisions between
gold-bull stages are fuzzy and gradual, if I had to pick a single
immensely important catalytic event that could do more to usher
in stage two than any other I believe it would be euro gold finally
breaking decisively above its vexing €350 resistance line.
When this
breakout happens, tens of millions of Europeans and other
foreign investors are going to suddenly believe in this bull.
And their capital will follow forcing gold up high enough to
decouple it from the chains of the fiat currencies.
As this chart shows, we recently
had a shot at €350 in early April but it failed. For a
variety of reasons I discussed at the time in "Euro
Gold Challenges E350" euro gold was just too technically
overextended after its sharp March rally and couldn't break through
to new all-time highs. But, this giant ascending wedge being
created by the euro's rising support and flat resistance lines
virtually assures a breakout is coming sooner or later here.
The higher the euro gold's
long-term support line trends, the tighter the technical gap
between prevailing euro-gold prices and the €350 breakout
becomes. As euro gold's support base creeps higher, the distance
it will have to cover to break out is relentlessly shrinking.
It would be far easier for euro gold to break above €350
for example if it launched its rally at €325 as compared
to €300.
€350 is only 8% above
€325, but 17% higher than €300. As long as its long-term
support line continues trending higher as in this graph, it is
only a matter of time until the euro blasts through this troublesome
€350 line that is tending to blind foreign investors to
the reality of a true global gold bull. The euro-gold technicals
virtually guarantee this breakout.
I even suspect that the coming
fall of €350 is even more important for this gold bull
than the fall of the $325
Maginot Line was for American investors back in December
2002. Europeans have a much deeper cultural affinity for
gold than Americans so if an €350 breakout brings them
back into gold en masse their capital inflows could be the very
trigger that lifts gold above the currency melee into stage two.
Unlike today's Americans including
I who have no memory of or personal experience with rapid currency
devaluations and out-of-control inflations, there are many wealthy
European investors who do remember these terrifying times. With
all the strife in Europe in the past century, memories of the
importance of gold as compared to inherently worthless fiat paper
run deep. It takes generations for cultures to forget just how
quickly an entire middle class can be utterly destroyed if they
have no gold when a paper currency fails.
Now I am certainly not arguing
that Europeans fear the end of the euro. It will eventually fail
in the distant future just like all fiat currencies of course,
including the US dollar, but almost certainly no time soon. I
am merely pointing out that Europeans have a deep cultural love
for gold unknown in the States. While Americans often have to
be dragged kicking and screaming into gold initially after a
great deal of persuasion, in Europe gold is far more widely accepted
as a necessary
component of every prudent portfolio.
So once the all-time euro gold
highs near €350 are surpassed, financial advisors all across
Europe can whip up charts to show their countless clients that
this gold bull is for real. Unlike Americans who often need a
hard sell to own gold, many Europeans will be thrilled to see
gold moving and innately want to invest. Since the global gold
market is so amazingly small compared to stocks, bonds, or other
currencies, it won't take a lot of extra marginal capital in
the grand scheme of things to really get gold moving.
We are continuing to closely
monitor this fascinating euro gold situation and I will certainly
discuss the €350 breakout in our acclaimed monthly Zeal Intelligence
newsletter for our subscribers
when it finally happens. I suspect there is a good probability
that there will be some excellent opportunities to trade elite
unhedged gold stocks as this long-awaited successful €350
challenge goes down. I can't wait!
The bottom line is euro gold
remains in a not-so-widely-recognized stealth bull market. Its
support continues to climb higher and higher and its key 200dma
is also meandering higher. If these trends persist, an €350
breakout to new all-time euro gold highs is inevitable.
The probable resulting surge
in gold investment demand out of Europe may indeed prove to be
the very spark that ignites stage two of this gold bull when
things really start to get interesting. Watch €350 gold!
July 30, 2004
Adam Hamilton, CPA
email:
zelotes@zealllc.com
Archives
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