Gold in Euros and Yen
2
Adam Hamilton
Archives
December 26, 2003
It is kind of funny, but at
least once a week I receive an e-mail from a European investor
that goes something like this "Adam, you keep writing about
a gold bull. What gold bull? That rally that you Americans are
calling a gold bull is really just a drop in the US dollar."
And, of course, these astute
European investors have an outstanding point. Every American
investor and speculator today has grown up in a US-dollar-dominated
world, and we Americans have a tough time thinking of anything
including gold denominated in other non-dollar currencies.
While the US dollar is not
likely to utterly dominate the globe in this new millennium,
it certainly did in the latter half of last century after World
War 2. It is definitely going to be challenging for all American
investors who grew up anytime in the last 50 years to start thinking
in terms of multiple currencies rather than one almighty dollar.
One exercise that can help
us perpetually myopic Americans understand major markets from
an international perspective is to view them through the lenses
of other major currencies. While this idea is simple, the insights
gained, at least for American investors, are really quite profound.
They help us to gradually shift our thinking from an antiquated
dollar-centric worldview to the true modern multi-currency world
in which we live.
This week I would like to update
our charts and analysis of the gold bull viewed from a European
and Japanese perspective. The US dollar, euro, and yen are really
the ruling triumvirate of world currencies at the moment, so
examining gold from all three angles grants us some excellent
insights into how today's gold bull looks from an American, European,
and Asian point of view.
If this analytical concept
is new to you, you may wish to skim my original "Gold
in Euros and Yen" essay. It delves far deeper into the
logic behind this analysis as well as discusses some of the fascinating
peculiarities of pricing gold in other world currencies.
For example, since the international
gold markets are still primarily dollar-denominated, amazingly
enough you can easily calculate the approximate local gold price
anywhere on Earth as long as you know the USD gold price and
the USD/local-currency exchange rate! Gold pricing alone is an
intriguing tangent.
Our charts are running a little
on the busy side this week, but they show what the gold price
action of the last couple years has looked like from an American,
European, and Asian perspective. In addition to graphing the
gold price in dollars, euros, and yen, in this latest iteration
we added long 200-day moving averages to these gold prices. 200dmas
are often the best technical proxy of long-term trends in progress,
so they help us visually process the price data quickly and easily
discern the major trends.
In both charts below USD gold
is graphed in yellow, with its 200dma in black, euro gold is
graphed in blue, with a white 200dma, and yen gold is graphed
in red with an accompanying light blue 200dma. USD gold and euro
gold are tied to the left axes and priced in ounces, while yen
gold is graphed on the right axes and follows the Japanese custom
of pricing gold in yen per gram.
It is really fascinating to
realize just how different that the same gold price can look
to different regions of the world when viewed through the unique
lenses of the dominant local currencies!
Buried deep in this chart in
yellow is the usual US-dollar gold price that we Americans are
so intimately familiar with. In the last couple years gold has
marched majestically northward, climbing from just over $275
to breaking decisively over the legendary $400 level today. We
American contrarians have already been blessed with enormous
winnings and multiplying fortunes in our gold bull to date, so
it is impossible to even discuss it without zeal and excitement.
Winning is fun!
The bull-market uptrend in
USD gold really has been outstanding, as the black USD-gold 200dma
line above mathematically illustrates. From an American perspective
our gold bull to date has been persistent and relentless, powering
higher like clockwork despite of the periodic and expected short-term
pullbacks to its 200dma to regroup for its next glorious assault
higher.
Now European investors, when
they aren't writing me charming e-mails, are seeing a vastly
different gold picture. The blue euro-gold line above and its
white 200dma betray a fact that is startling to most American
investors. There is no gold bull in Europe! Gold was trading
between E325 and E350 two years ago and it is trading in this
exact same tired range today! What gold bull indeed!
Why does euro gold look like
this? Because of the plunging US dollar. The international gold
market is largely denominated in dollars, although that will
almost certainly change if dollar weakness persists for more
than a few more years. But today, gold is effectively priced
first in US dollars and then the USD/local-currency exchange
rate is applied to compute the prevailing local-currency gold
price.
So as the US dollar falls,
gold, which truly is the ultimate form of money, becomes nominally
worth more and more, each ounce costing more dollars than it
had previously. But as the US dollar's bear market continues,
other currencies including the euro become relatively more valuable
in dollar terms. As the gold price rises in dollar terms, the
dollar price in euro terms falls. In other words, it takes fewer
euros to buy a given amount of dollars.
After the prevailing USD gold
price and USD/euro exchange rate are figured, the net gain in
euro-gold terms is roughly a wash. And this is exactly what we
observe on the chart above. The white euro-gold 200dma tells
the whole story. From a European perspective, there has been
no gold bull market yet. Euro-gold's 200dma has not only been
flat for a couple years now, but it even declined in 2003! Even
we myopic Americans can understand why a flat-lined price chart
is not very exciting!
The all-time euro-gold high
around E350 was first achieved in early 2002 and has been challenged
periodically since, but it has never been decisively exceeded.
E350 is the all-time high in euro terms primarily because the
euro as a currency didn't exist in decades past when previous
Great Gold Bulls stampeded, so this current gold bull is the
only one that the upstart euro has ever witnessed. And it is
nothing to write home about yet in euro terms!
Now speaking to my fellow Americans,
if you were a European investor and you saw a chart like this,
would you be breaking down the doors to pour your scarce and
valuable capital into gold? Me either. We really need to see
a couple things happen to get our European investing brethren
excited and pumping lots more capital into the world gold markets.
First, gold needs to decisively
carve a majestic new high in euro terms, say E375 minimum or
even better E400. Such a new euro-gold high would go a very long
ways towards convincing Europeans that the gold bull which we
Americans have been raving about for several years is the real
deal.
Absent exciting new euro-gold
highs, Europeans are going to continue to think that the American
gold bull is just an accounting trick thanks to Greenspan's horrific
destruction of the US dollar via rampant printing-press inflation
and hostile confiscatory short-term interest-rate manipulation.
Americans should eagerly look for new euro-gold highs too, as
without them the Europeans just might be right that our gold
bull so far is really just a masked dollar plunge.
Second, this euro-gold move
higher is going to have to be sustained long enough to drag the
crucial euro-gold 200dma into new record-high territory as well,
say over E350. The white euro-gold 200dma shown above will also
need to achieve a nice positive upslope, similar to the American
experience in our own gold bull. Sans real, hard evidence of
a euro-gold bull, major new highs and a rising 200dma, there
will be no convincing Europeans that this gold bull is for real.
The Japanese experience, on
the other hand, has more closely paralleled that of American
gold investors, yet it still falls far short. While the graph
above makes the respective bull-market uptrends of USD gold and
yen gold look similar, it is important to realize that these
non-zeroed axes do create some distortions. While they are useful
to examine price moves in detail, they can obscure total percentage
changes.
The overall gains in the three
major currencies' respective gold prices in percentage terms
since January 2002 help tell the whole story. USD gold has soared
by an amazing 47% in a little under two years, truly a magnificent
and extremely profitable number! Euro gold, on the other hand,
is only up by less than 6% over this same period, well under
the official 20%+ move needed over a year or more to officially
qualify for bull-market status.
Yen gold lies somewhere in
the middle of these two extremes, up 20% over the same period
charted above. To an Asian investor, gold is in a bull market,
but the last couple years of that have not witnessed major gains.
Yen gold has been slowly grinding higher over time, but at a
much slower pace than USD gold. Yen gold is also affected by
the severe dollar weakness caused by the US Fed's terrible anti-capital
policies.
Interestingly, yen gold has
fared better than euro gold primarily because the Japanese monetary
and interest-rate policies are almost as dysfunctional and counterproductive
as those of the US Fed. Because the Japanese economy relies heavily
on exporting to US consumers, a strong yen makes Japanese goods
less affordable to Americans and reduces Japanese export sales
in the States.
In order to try and remain
competitive, the Bank of Japan constantly prints fresh yen and
dumps it by the truckload in the international foreign-exchange
markets, buying US dollars with the proceeds. This enormous inflation
debasing the Japanese yen is designed to try and keep pace with
Greenspan's rampant dollar inflation. In a kind of twisted race
into inflating a currency away into oblivion as has happened
so many times before in world history, the Japanese strategy
is apparently to follow America into the fiat-paper abyss, but
trailing at a slower pace.
It is really sad and a pathetic
commentary on our day when governments around the world are actively
racing to debase and destroy their currencies in order to keep
up with other notorious debasers. What madness! In the end, the
ultimate losers are the savers and taxpayers of these countries,
the very folks who finance their respective governments. What
a crazy currency world it has become!
Zooming in to 2003 only, the
current major-currency gold trends are readily apparent. Once
again it is easy to understand why European and Asian investors
lack our American enthusiasm about this year's gold developments.
2003 year-to-date, USD gold
is up by a very impressive 17.9%. Euro gold, however, has actually
fallen by 0.1% or so in 2003, at best an uninspiring flat-lined
market unable to break through the fabled heavy resistance at
E350 thus far. Once again yen gold is in the middle, with a modest
6.6% gain in 2003. The international perspective on gold's performance
this year is very different outside of the dollar-dominated realm
in which we Americans are so comfortable.
While we are near USD gold
highs for the year now in the States, in euro and yen terms the
story on the current autumn gold rally is quite different. In
euro terms, gold managed to achieve its 2003 high way back in
early February near the heavy E350 resistance line. There was
one more challenge of E350 at the end of summer, but since then
it has generally been downhill for European gold investors.
The white euro-gold 200dma
line really illustrates this point, showing the modest downtrend
in which euro gold has languished for virtually all of 2003.
You really can't blame European investors for laughing at us
Americans and saying "What bull market?" when you look
at a gold chart through the euro lens. As much as I hate to admit
it, dollar weakness did indeed appear to account for most of
gold's USD rally in 2003, not necessarily a global bull market
in gold yet.
During Q4 of this year, when
USD gold rallied strongly, euro gold pretty much just ground
sideways after an initial minor rally in October. This should
not surprise us though, as the US dollar index has plummeted
by about 5% in Q4. Provocatively, USD gold is up by a similar
amount, about 6.5%, in the past 3 months or so. Thus, over 3/4th
of gold's Q4 rally in USD terms is probably directly attributable
to the plunging dollar on the Greenspanian monetary madness mercilessly
destroying capital in the United States.
Japanese investors fared a
bit better in 2003, as yen gold generally trended higher as the
light blue yen-gold 200dma line above illustrates. Still though,
visually it is very apparent that yen gold essentially traded
sideways during most of the year. After carving a high above
Y1450 in early February, gold in yen terms has not yet been able
to again challenge this major high since. In American terms,
this would be like having gold trading at $360 today after exceeding
$375 in February, not very exciting!
Unlike the euro, yen gold did
rally significantly along with USD gold in Q4. Once again this
development highlights the relentless pace at which the Bank
of Japan is creating and dumping yen and buying dollars in order
to ensure that its export-dominated economy doesn't sink back
into near-depression conditions. Just like Americans, one of
the best ways that Japanese investors can protect themselves
from the immense currency debasement being perpetrated by their
government is to buy and hold physical gold.
So, even though yen gold is
trading near the upper end of its 2003 trading range today, Japanese
gold investors have witnessed a 2003 where gold prices generally
ground sideways after a lot of early-year excitement. Unfortunately
I don't receive anywhere near the number of e-mails from Japan
that I am blessed to get from Europe, but if I did I suspect
that the Japanese investors wouldn't be as enthusiastic about
the gold bull as we Americans are either.
The bottom line is that our
gold bull to date that looks so darned impressive in US dollar
terms does not look quite the same when viewed through the lenses
of other major currencies. Depending on the degree of dollar
weakness relative to other currencies, the predominant local-currency
gold-bull trend today can look much weaker, flat, or even slightly
negative. While it is definitely hard for us who grew up in a
dollar-dominated world, we American investors must strive to
understand how this gold bull looks from around the globe, not
just in the States.
This understanding is not just
important in an abstract academic sense either, but is very practical.
For example, when euro gold breaks decisively above E350 and
its 200dma turns higher, it will be a major technical buy signal
to European investors, much like gold breaking $325 last year
was for us in the States. If we can detect a major breakout in
euro-gold or yen-gold terms early, then we can preposition our
capital to ride the edge of the massive wave created as new European
and Asian capital floods into the gold markets.
Watching gold in major local-currency
terms around the world certainly could yield significant actionable
trading information just ahead of major shifts in investment
demand for the Ancient Metal of Kings in other countries. Americans
need to be aware of major technical buy signals in gold in other
important world currencies as major fluctuations in international
gold demand can really affect our own trading here in the States.
While the Europeans appear
right at the moment, that much of the USD gold rally in 2003
was probably due to the plunging US dollar, there are still legendary
profits to be earned in the gold arena for investors all over
the globe! One of my personal favorite mega-opportunities is
in the quality unhedged gold stocks, which leverage the price
of gold on the order of 3x to 16x, as I analyzed in depth in
this month's December issue of our acclaimed Zeal Intelligence
newsletter for our subscribers.
The ultimate gains to be won
in the best gold stocks will vastly outstrip the fall in the
dollar, and yen, and ultimately the euro, by an order of magnitude
or more. So even if physical gold itself does only manage to
track the fall of the fiat currencies in the initial pre-mania
stages of its Great Bull, gold-stock gains have been and are
going to continue to be absolutely enormous. The fortunes earned
so far are probably only a drop in the bucket compared to what
is coming, if history again proves to be a valid guide!
In the upcoming January Zeal
Intelligence newsletter, which will be published before the first
weekend in January, we are digging deeper into fundamental analysis
of some of the most promising of these elite unhedged blue-chip
gold stocks. Please honor us with your subscription today if
you want to ensure that you receive this hot imminent January
issue of ZI right away as it is published!
Thank you so much for your
business and support in 2003! My team and I warmly wish you Godspeed
and great fortune in your investments and speculations in 2004!
May God bless you mightily in the New Year!
Adam Hamilton, CPA
email:
zelotes@zealllc.com
Archives
December 26, 2003
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