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!