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Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Gold in Euros and Yen

We Americans tend to be quite myopic in our worldviews. The United States of America has been incredibly blessed by God to grow into a mighty nation and the vast majority of Americans who have grown up in the past American Century tend to think exclusively in terms of an America-centric paradigm.

Yet, it is really a big world out there! With each passing year financial power and leverage gradually shifts out of the States and migrates towards the other economic mega-players on the planet.

While the US is enormously important and still dominates the global financial scene, a reunited Europe and a rising China both wield colossal economic clout. India cant be overlooked either, with its massive population and high standards of education. And of course some the non-Chinese Pacific Rim countries like Japan are among the largest economies on Earth today.

Naturally investors in these other economic powerhouses around the globe see the financial markets from their own unique cultural perspectives. While countless obvious tangible and subtle intangible factors color these vastly different national perceptions of the financial markets, one of the most important and obvious ones involves national currencies.

Just as we Americans tend to view everything in terms of dollars, since they are what we all grew up with and are most comfortable with, citizens of other nations view the financial world through the lens of their own unique national currencies. Europeans already see the world in euro terms, which is really pretty remarkable since this composite fiat currency remains so young. And the Japanese financial worldview is dominated by the yen, of course.

Along with the US dollar, the emergent euro and established yen form the current ruling currency triumvirate of the global financial markets. Each of these Big Three elite currencies is heavily used and traded and plays a crucial foundational role in the global economy today. They all bear much in common too, as they are all pure fiat currencies unbridled by gold backing that can therefore be inflated at unlimited rates if their respective central banks wish.

The lack of gold backing these thoroughbred paper currencies is a nontrivial issue with huge implications for the future global economy. The constant threat of inflation or even hyperinflation aside however, these paper currencies dramatically affect investors' perceptions of the gold price around the world. For example, the American view of the price of gold today is quite different from the European view, a revelation that surprises many Americans.

While a powerful gold bull continues to gloriously unfold in gold in US dollar terms, the gold picture when viewed through the lens of other major currencies can be a totally different beast. Since euros and yen are the two most important currencies on Earth today after the mighty US dollar, it is important for American investors to understand how the gold bull to date looks to our fellow European and Asian investors.

The actual pricing of gold in euros and yen is pretty interesting. While there are of course many free markets trading physical gold in Europe and Japan which continuously set gold's price in these currencies, surprisingly they are not the primary factor contributing to gold's euro and yen prices. Both the euro and yen gold prices are totally dominated by the exchange rates of the euro to dollar and yen to dollar.

The global gold market remains denominated almost exclusively in US dollars. Whether you chisel gold out of the bowels of the Earth in South Africa or buy it in India to fabricate into intricate dowry jewelry, the gold transactions always occur in US dollars or in the local-currency equivalent to US dollars per the current exchange rate. If an ounce of gold costs US$350 in the States it will cost the current equivalent in euros of US$350 in Europe or the current equivalent in yen of US$350 in Japan.

Due to this peculiarity in the dollar-dominated global gold market, any local gold price in any major gold market on Earth is almost always within one percent or so of the equivalent of the prevailing US dollar price of gold at the current local exchange rate. This is useful to know for investors because a local gold price anywhere on the planet can be easily calculated to within a percent or less if both the US dollar gold price and the dollar/local currency exchange rate are known.

For example, if we know both the US dollar gold price and the dollar/euro exchange rate, we can easily calculate about where gold will be trading today in euro terms. This week the dollar/euro exchange rate traded around 1.09, meaning that it costs US$1.09 to buy a single euro. At the same time gold in US dollars traded around $372 or so. The US dollar gold price of $372 divided by the dollar/euro exchange rate of $1.09 yields a euro gold price of E341.

Naturally the local gold price in any world currency can be calculated this way. While the actual physical price of gold in the markets and bazaars will vary slightly from this exchange-rate approximation, the variations are trivial and always revert back to the strategic US dollar/local currency exchange-rate price over a short period of time. In today's dollar-dominated global gold market, it is the dollar gold price that is ultimately translated into local currency terms.

The euro gold and yen gold prices in the graphs in this essay are also computed this way, based on the dollar gold price and the dollar/local currency exchange rates. Americans need to understand that European and Asian investors view the gold market in terms of euros and yen, so the local-currency gold price charts can vary significantly from the usual US dollar gold chart with which we are all familiar.

Our first graph this week offers a longer-term perspective since 2001, as early in that year our current magnificent US dollar gold bull started galloping out of the ashes of despair. US dollar gold and euro gold are tied to the left axis and priced in ounces, while yen gold is charted on the right axis and follows the Japanese custom of pricing gold in yen per gram. For all you Americans who have as much trouble internalizing the international metric system as I do, for reference a troy ounce contains a little over 31 grams.

With all three of the major global currencies superimposed on top of each other on this graph there is a lot going on here, so it helps to focus in on one currency (color) at a time. As a starting point of familiar reference, the yellow USD gold is the most logical point of embarkation to begin our analysis.

In USD terms the young gold bull has been outstanding. Starting near $250 in early 2001, gold has already blasted up through $375 in dollar terms in early 2003, a stunning gain of about 50%. Since the total global above-ground gold supply is so large, this raw gain in gold earned gold investors around the globe about $550b collectively, a staggering amount of capital. And this king's ransom of capital was earned during the most brutal few years of general equity-market action in modern memory, an important fact that cannot be overlooked!

My clients, partners, and I have been heavily invested in both gold and elite unhedged gold stocks throughout this entire USD gold bull and the realized gains with which we have already been blessed have been amazing. And odds are the best is still yet to come! Needless to say the future prospects for this unfolding gold bull greatly excite me as an investor and speculator, and I truly hope my zeal for gold shines through in some of the many dozens of gold essays I have penned.

Yet, after almost every one of my recent essays on gold is published investors soon write in from Europe and sometimes Japan and point out that the American perspective on gold is not universal. Yes, there has been a wonderful USD gold bull, but in euro terms the story is quite different. If you are a European investor, the blue euro gold chart above is the one you use to view the price of gold.

In euro terms the gold trend is still positive, but it has a much more moderate upslope than the steep yellow USD gold uptrend. In euro terms gold ran from around E275 to a little over E325 in mid-2001, but since that summer of two years ago gold has largely traded sideways. Euro gold was able to challenge E350 in both 2002 and 2003, and is once again surging towards these lofty levels today, but so far the monolithic E350 resistance has held solid.

So if you are a European investor, your perspective on the gold bull is likely quite different from us Americans. As many Europeans have graciously pointed out to me, from a European perspective the gold bull market of the past few years is widely believed to be primarily the product of a US dollar bear market, not necessarily a gold bull market. As the dollar falls in value, it takes more dollars to buy an ounce of gold so the dollar gold price rises on continual US dollar currency inflation and debasement by the out-of-control US Fed.

European investors see the modest gold uptrend drawn above in blue, but it really hasn't excited them much lately. As you can see above, in Q2 2003 when USD gold was around US$350, a price that is really fun for us battle-hardened American gold investors who weathered the parched pre-bull gold desert in the US$250s, the euro gold price was not at all impressive. E300 gold dominated much of the second quarter of 2003, a price that is only about 9% above where euro gold traded in early 2001! Yikes.

European investors, rightly so, are largely waiting for E350 gold to decisively fall to get excited about gold again. While gold has indeed surged back towards these levels in recent weeks, E350 still must be surpassed to kindle anything close to widespread European excitement in gold. On the bright side though, gold is much more accepted and revered in European culture than in American culture, so the European investors will probably not need much more convincing to pile back into gold than to see it decisively carve majestic new euro highs for a month or two.

Spinning the globe to Asia, surprisingly the Japanese perspective on the young gold bull is much like that of us Americans. As you can see above, the red yen gold price and trend lines have a nice positive upslope very comparable to what we see in USD gold in the States. There was a major divergence between yen gold and dollar gold in early 2002, but this gap has since closed and yen gold now tracks dollar gold rather closely.

Why is this? The weakening US dollar has dramatically lowered the magnitude of gold's uptrend in euro terms yet in yen terms the trends remain quite comparable. Strange stuff! A weaker US dollar should affect the local-currency gold price in every major currency, yet in yen it has kept pace with the dollar. This odd anomaly is actually due to unprecedented currency manipulation operations actively and openly carried out by the Japanese government.

Unlike the debt-laden US, the Japanese are a nation of savers and exporters. The whole Japanese economy is based on exporting manufactured goods around the world, with the United States being the primary destination. The weakening US dollar threatened to hurt Japanese manufacturers since it would mean that American consumers wouldn't have as much buying power if the yen strengthened. So, in a massive gamble to "protect" its huge manufacturing base, the Japanese central bank and government have been printing and creating yen out of thin air like there is no tomorrow.

Whenever the dollar falls, the Japanese authorities immediately flood the global market with fresh fiat yen within hours or days. This added supply of yen drives the price of yen down in dollar terms. In addition the Japanese government leverages these targeted currency-manipulation ops by buying dollars with the proceeds of these massive yen sales to ramp up their effectiveness.

Relatively fewer dollars chasing relatively more yen leads to a lower price of yen in dollars. The Japanese government is intentionally debasing its currency at a fantastic rate designed to at least keep parity with the gargantuan inflation currently being perpetrated by the US Fed.

Due to these anti-free-market official Japanese manipulations of the yen, the yen debasement has indeed just about kept pace with the dollar debasement and nullified its impact on Japanese exporters so far. A side effect of this deluge of virgin yen flooding into the world markets is that relatively more yen are chasing relatively less gold, driving up the yen gold price in the process allowing it to keep pace with the USD gold bull.

So, unlike the skeptical European investors who see the USD gold bull as largely a dollar debasement so far, the Japanese investors are looking at yen gold price charts every day that are very similar to our American specimens. General enthusiasm for gold in Japan continues to grow with each passing month. This is a very bullish development in the greatest nation of savers on Earth, as the Japanese people happen to command gargantuan pools of capital that could potentially migrate into gold, pushing its price dramatically higher from here.

With the benefit of a whole-gold-bull strategic perspective, our final chart this week zooms into the last year or so of gold action in dollars, euros, and yen. This shorter-term graph really highlights the remarkable degree of parity between yen gold and dollar gold as well as the massive gap between dollar gold and euro gold as the US dollar plummets and skews the gold bull in euro terms.

Even over the short-term, the uptrends of both yen gold and dollar gold share a similar nicely positive upslope. The primary difference is the interim gold high earlier this year, which was about US$380 or Y1460. While gold in dollar terms is right on the verge of beautifully thrusting above these interim highs to carve a new bull-market-to-date high, in yen terms there is still a little ways to go yet to see brand new yen gold highs.

Nevertheless though, I suspect both yen gold and dollar gold will make new highs soon, exciting both Japanese and American gold investors whenever the latest interim gold high-water marks are crossed in their respective nations.

Once again it is just remarkable how "well" the Japanese government has been able to actively debase and inflate its own yen to keep pace with the down-spiraling US dollar. Aspiring future market manipulators in government are going to study the actions of the Japanese government in recent years for decades to come. It is a moral outrage that the Japanese government is actively destroying the hard-earned savings of its own people by grossly debasing the yen, yet in this crazy immoral modern world totally devoid of any knowledge of history this deranged and destructive currency policy is viewed as positive. Woe unto them that call evil good!

Spinning the globe again, it is easy to see just how lackluster gold's performance has been in euro terms in the past year. It is no wonder that skeptical European investors write in to point out to me that the whole world doesn't view the gold bull the way we Americans do in light of this lethargic performance. Euro gold has traded in range between E300 and E350 for over a year now, with euro gold spending much of 2003 scraping the bottom of its trading range.

Also interesting to note is the blue lower support line of euro gold drawn in above, which actually slopes down. Down! Any European investor looking at gold from a technical perspective will be forced to notice that euro gold, at least in a short-term sense, is actually in a downtrend. They believe that most of the gains of the gold bull in US dollar terms are merely due to the US Fed's debasement of the fiat dollar, and the euro gold chart certainly backs up this popular European gold thesis.

Yet, all hope is not lost. Once gold crosses E350 decisively and trades above this key level for a month or so, vast hordes of European investors are going to suddenly get really interested in gold. And while most Americans pathetically couldn't even figure out how to invest in gold if someone put a gun to their heads, Europeans have seen enough wars, inflations, and currency destruction to know that gold investing is necessary and routine.

I have never met a European investor who didn't know how to go buy physical gold to hold in his own hands in one hour or less, often a routine transaction at a local European bank, yet I suspect that less than 10% of American investors have even the faintest clue about how or where to buy gold for investment.

Once E350 is crossed decisively and Europeans believe it will really hold, it would not surprise me one bit to see a big surge of gold investment demand in Europe. Watch for this very bullish E350 gold level to fall! This development will be great for global gold prices as well, as increased gold investment demand anywhere on Earth ultimately raises the prevailing US dollar price of gold and hence its price in all local currencies around the globe.

If you are a gold and gold-stock investor in the States, or Europe, or Japan, or anywhere, you may be interested in checking out the new September issue of our private Zeal Intelligence newsletter just published. Titled "Riding the PM Bull", it discusses and teaches how to use simple technical tools that can be easily deployed in any market and in any nation to enable investors to buy relatively low, sell relatively high, and automatically protect crucial core capital from devastating losses.

Please consider subscribing to ZI today and starting to apply these timeless techniques to your own portfolio! We will be happy to promptly send all new e-mail subscribers a complimentary PDF copy of this current September issue.

The best of this gold bull is almost certainly yet to come in every currency, and your best chance to prosper is to understand and use the proper tools to enable you to make the right decisions at the right time for multiplying your precious capital in this awesome young gold bull.

And all investors, especially us traditionally myopic Americans, ought to strive to maintain a more global perspective on the world financial markets. If we can understand how a given national market or a universal commodity looks through the eyes of the respective native investors, we can gain some excellent insights into the markets that are unavailable if we limit ourselves to one narrow financial perspective.

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