Born and raised in the United States, I am an American. For better or worse I think like an American, act like an American, and perceive the global financial markets through an American lens. Everything I write is colored by this American worldview.
But thanks to wonders of the young Information Age, I am immensely blessed to hear from investors living all over this fascinating world of ours. Zeal has subscribers from 50 countries and from time to time some graciously decide to write and help me understand the financial world from a broader perspective.
The more I talk with people living outside the States, the more I realize that the US is just one member, albeit a powerful one, in the global community of sovereign nations. And the US dollar is just another currency among many fiat alternatives even though it has dominated the world markets since the Second World War or so.
American investors today all grew up in this post-WW2 era where the mighty US dollar was the de facto currency of global commerce. As such, we have a hard time thinking outside our currency box in the extra-dollar terms that the rest of the world readily perceives when they consider the financial markets.
This American dollar-centric perspective versus the rest-of-the-world extra-dollar perspective is clashing today in a big way in the gold market. To Americans, gold in dollar terms is in a powerful secular bull market. Since 2001 we have seen the yellow metal march majestically from just over $250 to $455 or so, in a bullish trend that is helping American contrarians grow wealthy.
But many non-US-based investors believe that this very same dollar gold bull is little more than a secular dollar bear in reality. As the fiat dollar loses its international purchasing power, gold is merely rising in dollar terms to maintain its own stable purchasing power, directly offsetting dollar losses.
Unfortunately many Americans view this debate as academic, as not really important. After all, if we are making money in the States who cares what the world thinks of the gold bull? But whether this gold bull is the real deal or just the fruit of a dollar slide really has just as profound implications for Americans as it does for all investors worldwide.
Great bull markets in gold generally have three stages, all of which are necessary in order for a particular bull to reach its full potential. In Stage One, gold rises in the dominant world currency primarily because that currency is weakening for economic reasons. After this currency devaluation runs for four to five years, then Stage Two kicks in.
Stage Two is marked by global investment demand, increasing amounts of capital bidding up gold worldwide. It is in Stage Two that gold really starts rising in all currencies concurrently, not just the devaluing dominant one. Years after this a Stage Three is even possible, a near vertical final parabolic ascent as the general public succumbs to gold lust and ignites a popular speculative gold mania similar to the NASDAQ bubble of 2000.
Our current gold bull is probably nearing the end of Stage One, a currency devaluation, before it hits the crucial transition into Stage Two, where global investment demand accelerates pushing gold higher in all major currencies. If this transition does not happen, then this dollar gold bull will be limited to advances mirroring dollar losses and will never achieve greatness.
I suspect the success or lack thereof of this crucial transition is dependent on foreign investors. With gold in US dollar terms up about 80% bull to date, and gold stocks up over 600% in the States, American investors have already had plenty of opportunities to saddle up and ride this bull. I doubt there are any contrarian-oriented or just plain savvy investors left in the US who are not at least aware of gold's advance in dollar terms.
Yet, to date all the American capital thrown at gold has not been able to overcome gold's inertia of trading in lockstep opposition to the secular dollar bear. I suspect the greatest pool of contrarian capital out there today that would love to bid on gold if its bull market was proven beyond argument exists in Europe and Asia. If the European and Asian contrarians grow excited about gold, their capital ought to be more than enough to kick it into Stage Two where it rises against all currencies.
But the problem lies in perceptions. To Europeans, for example, gold has been trading sideways since 2001, the year the gold bull launched in the States in dollar terms. In May 2001 gold in euros briefly hit €330, as the chart below shows. But unfortunately today, exactly four years later, euro gold is yet again trading at this very same €330 level. In extra-dollar terms gold looks flat, not exactly inspiring for non-American contrarians.
And the non-US investors are right to be skeptical. In May 2001 gold was running near $285 in dollars. Believe me, if gold was still trading at $285 today you wouldn't be reading this essay because the gold community would remain infinitesimally small. If the price of any asset hasn't risen over four years, then it is not going to have many advocates beyond a handful of hardcore perma-bull faithful.
So getting foreign contrarian investors interested in gold is not going to be easy as long as gold appears to be grinding sideways to them. Why invest at all in something that doesn't appear to be appreciating in price?
I find it fascinating though that gold already has been moving up in other major currencies, but at a much slower rate than the dollar. Unfortunately technical anomalies are masking this extra-dollar progress in gold and helping convince foreign investors that the gold bull is really just a dollar bear. Most of it is a dollar bear, but certainly not all. If we consider gold in euros, these developments are readily apparent. A stealth bull is already underway.
Our charts this week are updated from the original "Euro Gold Stealth Bull" essay of last summer. This earlier essay has more background information on exchange rates and the effect of the dollar bear on non-dollar gold prices. In these charts the dollar cost of each euro is graphed in red on the left axis while the price of an ounce of gold in euros is graphed in blue on the right. Euro gold, contrary to popular perception, is already in a secular uptrend.
Before we delve into the euro gold stealth bull, it is important to consider the red dollar line in the background. It shows how many dollars it has taken over recent years to buy a single euro. Back in 2001 it only cost around $0.85 to buy a euro, but today this same euro runs Americans about $1.30. The euro has appreciated dramatically since the bull market in dollar gold launched in early 2001.
Not surprisingly the bull market in the euro roughly mirrors the bull market in gold, with generally symmetrical major peaks and troughs. Gold and the euro are both the primary beneficiaries of the dollar's secular bear market. But the gold bull running parallel with the other currency bulls in response to the dollar's bear creates a huge problem. When foreign investors look at gold in their local currency terms, they see a flat market.
The blue euro gold line above is representative of many currencies. Gold in euros first hit €350 way back in early 2002, ultimately trying several times unsuccessfully to break above €350. After regrouping gold once again challenged €350 in early 2003, again being repelled by the increasingly apparent resistance. Finally, last year in early 2004 euro gold spiked near €350 one more time then promptly collapsed.
The result of three consecutive years of heavy and thus far impenetrable gold resistance near €350 has understandably led European investors to view gold as flat at best. After all, a European investor who went long gold in early 2002 near €350 would be carrying a loss three years later today. This investor, naturally, would view gold in neutral or bearish terms since its price has not appreciated in his local currency.
This €350 line in the sand has therefore become the perceived resistance in euro gold. I have talked with plenty of European investors in the last couple years who tell me that until euro gold decisively breaks €350 the gold bull we Americans laud is nothing but a dollar bear in disguise. I suspect this long-awaited €350 breakout will be a big catalyst that ignites widespread European investment in gold, possibly launching Stage Two of its bull market.
But what if we consider euro gold not from its tops, its perceived resistance at €350, but from its interim bottoms? On the low side of this chart euro gold has marched resolutely from just over €275 in early 2001 to just under €325 today. If a linear support line is drawn through euro gold's periodic interim lows it has intercepts in 2001, 2003, 2004, and 2005. It is a well-defined secular support line rising in a bull-market upslope!
Trend channels are defined by drawing a best-fit support line, copying its slope, and adding a parallel resistance line on the top of the chart. Just such a line is drawn in above for euro gold. Interestingly this parallel resistance line has intercepts in 2001, 2002, 2003, and 2004, so it too appears to be solid. These support and resistance lines together form a provocative uptrend channel that shows euro gold already in a modest secular bull market.
If this well-defined uptrend is real, then euro gold is in a stealth bull today. European investors are usually remembering the lofty €350 peaks of past years and considering today's action with disgust, but by focusing on the peaks they are missing the relentlessly rising valley floor. What if the €350 peaks of 2002/2003 were not representative of euro gold's secular trend but instead were speculative anomalies?
Even though prices often do tend to run in trends that can be bound by lines, they certainly don't have to. Sometimes events can conspire to create short-lived price anomalies. A surge in fear can create a sharp yet temporary plunge and a surge in greed can ignite sharp yet fleeting parabolic ascents. How can we know which price moves are anomalous and which are sustainable? Both by the sharpness of the moves and the length of time that they ultimately persist.
Markets in secular bulls tend to move up gradually, taking two steps forward in an upleg before one step back in a correction. But all three of the potential euro gold anomalies, marked above, rocketed up with blistering speed and soon after collapsed at a similar velocity. Near vertical moves, since capital seldom chases an asset fast enough to sustain them, are often short-lived price anomalies.
And while it is pretty rare, it is possible for a price in a bull market to rocket higher but then remain at a new higher plateau without correcting sharply. I see this most often in companies that are acquisition targets. The news of a potential merger breaks, the stock shoots higher, and it starts trading from a new higher base indefinitely. Such news marks a fundamental change in outlook for the company.
In euro gold's case though, its last two anomalies collapsed either immediately or not too long after €350 was challenged. And all three fit the price anomaly signature in a bull market. They had sharp initial moves higher driven by emotional speculation rather than true fundamental change. As such each anomaly proved unsustainable as it soon collapsed under its own weight and plunged just as fast as it had risen.
Therefore, I think the argument can be advanced that euro gold's true primary resistance line is not the perceived €350 high-water mark established by unsustainable price anomalies, but the linear rising resistance line running parallel with its support. And if this parallel resistance line is euro gold's actual resistance, then it is in a stealth bull market that is now being overlooked in the shadow of the earlier €350 forays.
On a sidenote, extra-trend unsustainable price anomalies are not uncommon. Silver had one in early 2004 that rocketed higher above trend but then immediately collapsed back down into trend. The HUI bull broke above its secular trend temporarily in both 2002 and 2003. In all of these other cases though, just like euro gold, the prices soon collapsed from their speculative anomalies back down into their secular trend channels.
If the euro gold bull-market uptrend channel drawn above is correct, then there should be another way to verify it. In a secular bull market the 200-day moving average of a price tends to run parallel with its primary trend. Like a big arrow the slow-moving 200dma points in the direction that a market is generally heading, filtering out the endless day-to-day volatility noise. Interestingly this euro gold uptrend passes this technical test.
From mid-2003 until today, the black euro gold 200dma line above has indeed been running roughly parallel with the uptrend channel drawn off of euro gold's major interim lows. From early 2002 until mid-2003 the 200dma was not parallel with this trend, but this is a residual effect of the first two price anomalies. Since a 200dma encompasses about 10 months of trading data, it takes awhile for the 200dma to digest and cycle a large price anomaly through its system.
One more thought on these euro gold anomalies. All three anomalies coincided with similar anomalous events in dollar gold. In each case dollar gold surged dramatically on speculative fervor but then promptly collapsed as fast as it had risen. To give an example of what can drive these things, the third anomaly in 2003 corresponded with the widespread fears in the run up to Washington's invasion of Iraq. At the time speculators feared the invasion would not go smoothly so they bid up gold in an unsustainable anomaly. As the extreme uncertainty bled off, gold plunged.
With euro gold's interim lows rising, and a parallel resistance line drawn through its tops having many intercepts over years, euro gold may already be in a stealth bull. In order to perceive this however, one has to be willing to consider sharp vertical moves that soon prove unsustainable to be extra-trend anomalies. The actual trend resistance is rising and €350 is just the perceived resistance based off of those earlier euphoric spikes.
If this theory on euro gold proves correct, it has some really bullish implications. Our final chart, zoomed in to the last 16 months or so, helps illustrate the current technical possibilities of the euro gold stealth bull.
Now €350 is considered impenetrable and the crucial mark to establish a gold bull market in the minds of European investors because it has never been decisively broken. But if this stealth bull technical theory is correct, then the perceived resistance at €350 was unlikely to be decisively broken until the actual resistance, the rising linear top line, marched over €350 as well. Probabilities virtually always conspire against a price suddenly shooting out of a secular trend and staying high for the long-term.
Actual resistance didn't move above the crucial €350 perception line until last summer, so the window in which the technical probabilities started to favor an €350 breakout is relatively young. And in technical terms many technicians don't like to consider a breakout the real deal until it moves 2% beyond the breakout level. By this standard an €350 breakout wouldn't decisively occur until euro gold hits €357. But actual resistance didn't exceed €357 until just this year.
Thus, if a technical euro gold stealth bull does indeed exist because the earlier €350 attempts were unsustainable fleeting anomalies, euro gold was not likely to break and stay above its rising actual resistance line. And since this line didn't crest €350 until very recently, the probabilities of a sustained €350 breakout in the past were low. But with actual resistance now above €350 and climbing, the probabilities of the €350 breakout finally occurring are rising every week.
Today euro gold's secular support is near €325, not too far from €350. This is much higher than the €300 support levels of early 2003, the last time euro gold tried to break the €350 chains. From this much higher base, which is rising constantly, euro gold has a growing probability of rising beyond €350 and staying there for good.
I continue to believe that this probable coming €350 breakout will prove to be the single most important technical event of this entire gold bull to date. I think it is a far bigger deal even than gold climbing north of $500 in dollar terms. €350 could very well prove to be the very catalyst that ignites Stage Two, when gold rises in all currencies instead of just primarily the US dollar.
Why is this €350 breakout so crucial? Regardless of the technical arguments for an already underway stealth bull in euro gold the €350 high-water mark of recent years still colors the perceptions of most European contrarians. They are well aware of the dollar bear and dollar gold bull, but until they see gold rise to new bull-to-date highs in their local currency they will remain skeptical that gold has any real strength beyond the dollar's weakness.
€350 has an excellent chance of unleashing great pools of European capital that have largely remained on the sidelines until now. This added international gold demand could very well catapult it up into Stage Two where it starts rising at a more rapid pace in all currencies, not just the US dollar. More than any other single factor, international investor participation could radically change the face of this entire gold bull.
At Zeal we are continuing to closely monitor the euro gold situation and will certainly report to our newsletter subscribers when it once again challenges €350. This will probably be an excellent opportunity to add new trades since a further surge in gold is probable once the Europeans believe €350 is decisively broken and start chasing gold again.
In the meantime, if you are European, I hope you consider the possibility that euro gold has already been in a moderate stealth bull. It is not the unsustainable anomalies that make a bull or bear, but the prevailing primary trend. And while most of the gold action has been due to the dollar bear, not all of it has.
