Gold-Bull ... or Bear Crap?

By: Alex Wallenwein | Mon, Jan 12, 2004
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Is there really a gold bull market???

That is a question that has been discussed quite a bit recently. The issue is: the incredible gold-bull seen lately appears to be happening only in the USD, as gold seems to be declining against most of the other major currencies, especially those that have appreciated strongly against the dollar of late.

So, is this really a secular gold bull as we have all been celebrating for the past two and a half years?? Or is this gold "bull" just that, and in truth only a dollar-bear?

There is only one way to lay this argument to rest, and that is to take a look at the short term and long term charts for the major currencies relative to gold.

Fortunately, that's real easy, since Nick Laird, the owner of the famous "Sharelynx.com" gold web-portal (http://www.sharelynx.com) has already done all of the work.

On top of that, he has recently completely overhauled his site organization and structure so that now all of these facts/figures/charts/resources can be found and accessed easily (which wasn't always the case before). If you haven't got one yet, I strongly recommend to everyone a subscription to his site. It used to be free, but the kind of work Nick aka "Sharefin" has put up, and the immeasurable resources he provides ready access to, just absolutely need to be rewarded. And it's cheap, especially considering what you're getting.

Ok. Back to our subject.

Below is a link to the charts Nick has put together. Each currency has an immediate comparison between the COMEX dollar- price of gold, the currency's relationship to the dollar, and its price in gold, both for the short term (since about 2001) and long term (since 1974 in most cases).

A very quick comparison between all of the charts shows one thing very clearly: gold is in no way dropping against any of these currencies in the short term (since 2001). Only in some of them (about half) is there a slight decrease in their gold price in the very short term (the last three months or so). Only one currency stands out in that respect: the South African Rand.

You can review all of the relevant charts right here:

http://www.sharelynx.com/chartstemp/GoldCurrency.php

Because Nick is such a great guy, he has given all of my subscribers (and now readers) free access to a special page he created just for you, because I told him how great his charts are and asked him for permission to reproduce them here in this issue of the Monitor. But he did me one better and created this page for you. You will be able to access this info for the next few weeks. What a guy!

The following table summarizes all the trends reflected in these charts.

Currency S/T Wedge
Formation
Direction
L/T Wedge
Formation
Direction
S/T -
Wedge
Breakout
L/T -
Wedge
Breakout
S/T vs
Gold
(2001)
S/T vs
Dollar (2001)
L/T vs
Gold
(1980)*
L/T vs
Dollar
(1980)*
AUD flat flat yes no down up up down
EUR flat flat no no down up (up) ** (down) **
SDR rising flat not quite yes down up up *** up ***
SAR flat (tight) n/a (trend up) yes n/a up *** up down down
DM flat flat no yes down up up up
BP no triangle flat n/a yes down up up down
SF rising flat no yes down up up up
JPY flat flat/rising not quite no down up up up
CAD flat flat yes (big) yes (big) down up up down

* We use 1980 as the reference point since prior thereto, in 1974 for example, the price was so low (in the $40s) that any comparison makes it seem like the POG has always been rising in fiat terms since then. (We think that it obviously has, but we'll tie one of our arms behind our back for now - just to make it "fair" for the fiats).

** The euro has no long-term chart (has only existed since 1999)

*** Almost flat, but slightly up.

**** Even the SAR has turned down against gold in the extreme short term (the past two weeks), the same time during which the Rand POG broke out of its short-term converging triangle.

(Please be aware that, for practical as well as philosophical reasons, we do not refer to gold as "rising" or "falling" against fiat currencies. It is the fiats of the world that are rising or falling against gold, since gold in reality continues to be the standard of value for all economic transactions.)

So, why is the rand different? Simple: South Africa is (still) the number one gold producer of the world, and gold production is its top industry. Therefore, its currency is most dependent on the price of gold internationally. While all other currencies were generally rising against gold (the gold price decreased in these currencies), the rand therefore fell. Now that the short-term trend of all currencies is falling against gold since 2001, the rand has been rising against gold, meaning, the Rand-price of gold has been falling.

However, you will note that the Rand's POG has now broken out of its very tight short-term wedge formation, definitively to the upside. This means that the Rand is starting to follow the other currencies vis a vis gold. If this continues to be the case for the next few weeks and months, it would be a good indicator, all by itself, that the entire international currencies/gold relationship of the past twenty years is in the process of breaking down.

This would also tend to show that the rand is a perfect lead-indicator of the new "very short-term" trend for all other currencies.

If this is true, even the euro should soon break out of its rather wide converging triangle, despite currently being lodged firmly in the middle of it. What exactly "soon" means remains to be seen, but the trend certainly points in the right direction.

Generally, the table shows that all currencies other than the rand in no way are "appreciating" against gold in the (three-year) short term. That trend is firmly up for all of them.

Not only that, but as the charts show, the great majority of these currencies are very near, or actually "hugging" the top line of their respective wedge formation (with exception of the Swiss Franc, whose lower wedge line is so steeply rising that its POG, should it continue sideways as it has since about mid-November, might break through the lower wedge line by that fact alone.)

In three of the charts (the AUD, SAR, and CAD), the POG has already broken out to the upside. The JPY and SDR are very near breakout, hugging the upper line, while the British Pound has no wedge formation, but its short term POG is very strongly rising anyway. On the other hand, the Pound has a long-term wedge from which its POG has already broken out since mid-2003.

The charts speak with convincing clarity: there is no such thing as a "gold-bear" in other currencies. However, in the very short term, some currencies' POG did in fact decline somewhat, most notably the AUD's, which has declined since the beginning of 2003 and the EUR's, which has dropped off slightly since mid-2002.

Why does this happen?

To answer that, we must find out what determines the "Euro POG" (or any other currency's POG) for example. The answer is amazingly simple: the price of gold in any currency other than the dollar is simply the "spread" between the currency's forex value and the dollar POG.

That means, if the dollar's POG is rising, but the euro's value to the dollar is rising faster, the euro-POG declines (the "spread" narrows). If the dollar POG rises and the euro loses strength against the dollar, the euro's POG rises precipitously, and vice-versa. Therefore, because the euro is rising faster than the dollar POG, the euro POG is falling (meaning the spread between the euro-gold price and the dollar-gold price is narrowing).

Its that simple.

So, in effect, the POG of any currency other than the US dollar's is flat-out irrelevant as long as the internationally accepted and traded POG is quoted in dollars. It's just a function of the difference between the currency under consideration and the dollar-gold price.

It is the dollar's movement relative to gold that determines if there is a viable bull-market in gold. Nothing else matters!

As long as the dollar falls against gold, there IS a gold-bull. If the dollar rises against gold, we have a gold-bear. Period. Those who worry that the current dollar gold-bull is "more bull than gold" are mistaken. As long as gold is sold for dollars and quoted in dollars internationally, all worries about what the lack of a gold-bull in other currencies means to the future of gold are essentially bear-crap.

This can easily be seen by the fact that during the late nineties, there were numerous times when the POG rose in international currency terms. A number of commentators then pointed to those currency/gold ratios and exclaimed ecstatically: "Look, gold is already rising in all of these currencies. Just wait until it rises in terms of the dollar, too. Then it will really take off!" (paraphrased version). They did not realize that any "gold-bull" in other currencies makes not a whiff of a difference as long as those other currencies' POGs are determined by the spread between dollar-gold and their own currency's exchange rate to the dollar.

Put another way, assume the other currencies are starting to fall against the dollar (meaning the dollar gets more "attractive" again). As we have seen, this would mean their internal gold-prices starts "rising." Is that in any way, shape, or form a "confirmation" of the gold-bull that is necessary in order to make the gold-bull "real"?

Not at all! Such would rather mean an end to the dollar-gold bull since investors then (under the familiar, paper-induced brain-death syndrome) would move out of gold and back into the dollar.

Who's driving Whom?

So, does this then mean that the gold-bull really is only a function of the dollar's current weakness?

Nope.

Gold (and silver) will still be the mountain, the dollar will still be just one of many hikers, (please see our essay What Is Value? if you don't know what the "mountain" and the "hikers" represent). The only difference is that the dollar will now climb the mountain instead of falling off of it. Just let any real crisis come about (say, a vicious high-altitude monetary blizzard) and you're gonna see real fast who the mountain is and who the hiker is, and who is falling "off of" whom. (Excuse my English, please.)

Will the wind blow the mountain over? Nope. But if you are smart and you took refuge in a cave somewhere in the mountain (meaning, you took financial cover in gold/silver) and look outside, you'll see a flying hiker "passing by" real fast on his way back to the valley.

Paper-money is always a risk-play. People who tell you gold is "outdated" are essentially telling you that you are safer from financial storms in the hiker's backpack than inside the mountain. And people who tell you that the gold price is "only" a function of the falling dollar are in essence telling you that the mountain is riding on the hiker's back. Boy, would I hate to be that hiker!

The fact remains that the value of paper with funny symbols on it doesn't really drive anything at all - in the final analysis. Paper, although legislatively decreed to be "payment for all debts, public and private" still isn't final payment. It still isn't the ultimate form of payment, as even Alan G. has not too long ago officially acknowledged in testimony before Congress (before the Senate Banking & Finance Committee in 1999, to be precise).

And right he is!

Whatever the "ultimate" form of payment will be cannot be determined by the official pronouncements of a few elected or appointed boobs in public office, because "ultimate" means when the chips are down, aka: "when the sh-t has already hit the fan and is being evenly distributed by sheer centrifugal force." Under those condition, only one law determines what is "ultimate", and that law is the law of supply and demand. And we all know what has always been considered to be in demand in the final analysis, under the pressure-cooker conditions of an honest-to-goodness economic catastrophe: gold and silver.

Precious metals.

Nothing else.

And that's what will count this time around, as well.

Make no mistake: our economic policymakers know this very well. They just haven't quite figured out yet which rock to crawl under to hide from public view when Doomerang hits. But you can bet your life on one thing: they all have their own little stash of gold tucked away - somewhere. They just won't tell you about it.

Personally, as far as choosing a "rock" goes, I would suggest that speedy deliberations are in order.

Got Gold?


 

Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

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