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October 14, 2005

Global Gold Highs
by Adam Hamilton

Earlier this week gold closed over $475 in US dollar terms and came within spitting distance of €400 in euros. These stunning levels are far above the $256 and €277 bear-market lows of early 2001. This gold bull has come a long way!

While gold's fresh new bull-to-date dollar highs are certainly exciting for American contrarians, the new global gold highs being achieving in the euro and other currencies are far more important. Gold's amazing dollar-independent strength since June or so really supports the thesis that this gold bull is transitioning into Stage Two. A few weeks ago I discussed the accumulating evidence for Stage Two as well as defined it...

"Stage One is primarily currency-devaluation driven. This is what we have witnessed in recent years as gold typically only gained significant ground when the US dollar, the world's reserve currency, was losing value. Stage Two is driven by global investment demand which makes gold decouple from the dominant currency and rise on its own fundamental merits in all currencies simultaneously."

Stage Two is so important for investors because the gains that are likely to be reaped in this phase of gold's long-term bull-market parabola should utterly dwarf those Stage One gains with which we have been blessed so far. Identifying whether we now sojourn in the early stages of Stage Two or still linger in Stage One is also very important to speculators as trading strategies vary significantly across the different stages.

In Stage One gold's primary driver is the devaluation in the dominant currency. Because of this, gold has been very successfully traded in recent years based on the flowing and ebbing of the dollar bear. But since gold decouples from the dollar in Stage Two, all the dollar-based gold trading strategies are doomed to fail sooner or later.

The ability to discern when probabilities favor optimal buying and selling times depends on our relative position within gold's three-stage bull. Since Stage Two is defined as gold rising in all currencies simultaneously, we can look at gold charts from dominant currencies around the world to see if this is really happening today. This is a simple exercise in theory, but finding the necessary comparable charts is difficult.

If one searches long enough, gold charts in any currency can be dredged up off the internet. But unfortunately they are not readily comparable. They run for widely differing periods of time, their scales vary considerably, their units of measurement are often local (like pricing gold in grams instead of ounces), and they are heavily biased towards the short term. Charts of the last few months are vastly more prevalent than secular charts.

For quite some time I have looked for comparable secular global gold charts that are updated periodically. After failing in this quest, I decided to build such charts internally so we had them for reference. These charts, especially when all are considered together and compared and contrasted, offer a superior perspective on Stage Two. I'd like to update these charts several times a year or so over the coming years to monitor gold's global progress.

For this inaugural iteration, I chose ten currencies in which to chart this gold bull to date. I tried to include all the major and important world currencies as well as a couple less important regional ones so all continents are represented. We'll start in North America, swing through South America, head to Europe, visit the hugely important Asian giants, stop over down under in Australia, and conclude our journey in Africa.

All of these charts share a common format for easy comparability. On the left axis, the dollar cost of a single unit of each foreign currency is charted in red. This shows the relative strength (rising) or weakness (falling) of each currency relative to the dollar over the course of this gold bull. Overlaid on top of this and slaved to the right axis are the foreign gold price, key moving averages, and Bollinger Bands.

To keep these charts comparable, all gold prices are quoted in currency per troy ounce even if not local custom. For example, in Japan gold is typically quoted in yen per gram but this is not comparable. In addition all exchange rates are quoted in the dollar cost of one unit of local currency even if not customary. For instance, in Japanese yen the exchange rate is typically quoted as yen per dollar, like ¥113, instead of dollar per yen, like $0.008827, for obvious reasons.

If these customary reverse rates that are easier to quote because they are not fractional are charted, the relative strength and weakness of the dollar is inverted. I wanted a rising red line on any of these charts, regardless of custom, to show a local currency gaining strength against the US dollar. As such, a given forex rate, especially if fractional, might be the inverse from what is reported on the news each day.

Technically, on each chart the secular lows and highs in both gold and exchange rates are marked with arrowheads and bull-to-date gains/losses are noted. Major long-term technical trendlines are also rendered to help highlight the prevailing secular trends. Technical analysis works the same all over the world regardless of the nationality of the investment being studied.

The six major bull-to-date highs in dollar gold are also noted in each chart. Green numbers represent a new bull-to-date high while red numbers mark a time when US dollar gold made a new high but local-currency gold did not. This helps us better understand how our various major US gold highs looked to foreign investors in their home currency so far in this bull to date.

So is gold finally rising in all currencies simultaneously? Yes, for the most part. It is rising in all major currencies today and making new bull-to-date highs in the most important world currencies. But in some less important currencies that have seen a lot of chaotic turmoil in the past five years gold still remains far off new bull-to-date highs. If you are a gold investor the following global gold journey should prove fascinating.

Love it or hate it, dollar gold is still the standard by which this gold bull is measured. Not only is the dollar still the dominant global currency even though its hegemony is waning, but the global gold market is priced in dollars. No matter where on earth gold is mined it is sold for US dollars or else the local-currency equivalent of the prevailing US dollar price per ounce. Maybe gold will be universally priced in Chinese yuan someday, but for now the dollar remains king in the gold world.

For the red dollar "exchange rate" above, we are using the US Dollar Index. This index averages the exchange rates between the US dollar and six of the world's major currencies including the euro, yen, British pound, and Canadian dollar. These countries constitute the bulk of international trade with the US. As this index shows, the international value of the dollar has fallen by a third since 2001 during the dollar's bear.

During this time dollar gold has powered higher in a relentless secular bull. It is up 85% bull to date and has carved a remarkably well-defined uptrend that is rendered above. While not quite there yet, dollar gold is certainly nearing its upper resistance line again that has repelled it into major corrections several prior times in this bull to date. Dollar gold may very well correct and regroup once it challenges this resistance line again.

In Canada, like most of the rest of the world, this gold bull has not been as strong yet since a big part of dollar-gold gains were offset by gains in the local currency. The Canadian dollar is up 39% since its low in early 2002, which has clipped gold's bull-to-date gains to 40% or so. In early 2003 Canadian gold rocketed higher to a 48% gain before the Canadian dollar really started rising, but this C$581 level has yet to be exceeded.

While finally breaking out today, for almost two years now Canadian dollar gold has been mired in a tight and gradually downsloping trading range. Naturally this has sapped the enthusiasm of Canadian gold investors somewhat, but Canadian miners have still thrived tremendously in this gold bull. To get gold in the financial news in a big way in Canada, it will have to exceed C$600 or so and trade to new bull-to-date highs.

While South America doesn't even appear on the global radar in the major-currency category, I did still want the continent represented in our global gold survey. I chose Brazil not because it has a strong currency, but because there are no strong currencies in South America and Brazil dominates the continent's economy. As the regional leader, the Brazilian real is probably the most important gold measure in South America.

Like the Canadian dollar, the highest bull-to-date Brazil gold price occurred in early 2003, a magnificent 166% gain. While the real has been growing consistently stronger against the dollar since then and eroding gold's gains, Brazil gold is still up 104% bull-to-date today, considerably better than even US dollar gold. In order to break out Brazil gold must exceed R$1200 or so. To get Brazilians really excited we will need to see new bull-to-date highs well above the R$1400 last challenged in early 2003.

Of all these non-US-dollar gold charts, euro gold is probably the most universally known and followed. I have written a lot about it and believe the euro gold breakout of recent months is tremendously important. While euro gold struggled with €350 for many years, it has now broken decisively above these chains and is even challenging €400. This is really starting to intrigue European investors and ought to entice a lot more capital into the gold market worldwide.

And the euro itself, though it has corrected recently as the red line shows, still remains very strong relative to the dollar from a secular perspective. While the euro is also pure fiat and is not superior to the dollar in a sound-money sense, Europe seems to have far less debt and inflation problems than the States so the euro should continue appreciating. Some Middle Eastern OPEC countries are even discussing pricing oil in euros.

The UK is not only a major European economic power, but it is hugely important in the gold world. For centuries London has been the center of the world gold trade and this is unlikely to change in the foreseeable future. Despite the pound strengthening against the US dollar, the UK gold price is also in a powerful secular bull market that has broken out to fantastic new bull-to-date highs recently.

The UK gold uptrend rendered above is well-defined with its 200-day moving average running parallel. Gold will probably correct to at least £250 or so, at its long-term resistance line, before making an assault on new highs. With UK gold already much higher than it has been bull to date, British investors are really starting to pay attention. And the goofy Bank of England managers, which sold much British gold near the 2001 lows, are being exposed as hopelessly inept.

Moving on to Asia, which will dominate this century economically and politically, Japan gold has also catapulted up to a dazzling new bull-to-date high. This is really exciting as the Japanese culture is one of the wealthiest in the world due to Japan's high savings rates. As Japanese investors get excited and move more of their vast capital into physical gold, they can single-handedly drive it higher around the globe. After the dollar and euro, the yen is the third most important currency on earth today.

Up 81% bull to date, yen gold is up a similar magnitude to US dollar gold. Just as gold is gradually winning more airtime in the US financial media these days due to its new highs, my Japanese investor friends tell me gold is also getting more coverage in Japan. If these high yen gold prices persist as they ought to, more and more Japanese mainstream investors will start deploying a portion of their capital into physical gold to ride this bull.

While China has long pegged its yuan to the US dollar, as the tremendously exciting flat red line above highlights, it is finally starting a gradual controlled float of its currency. And since China is universally considered to be the next global superpower, the price of gold in yuan is only going to get more important in the coming years. So far, due to the dollar peg, yuan gold looks exactly like US dollar gold except for the last few months.

Technically it is interesting as yuan gold could go quite a bit higher, even over CY4000 per ounce, before it hits its upper resistance line that has repelled it several times. The longer these high yuan gold prices persist, the more Chinese investors will want to buy physical gold. The Chinese have a long history of capitalism and speculation and few peoples on earth have a greater cultural affinity for gold. While the average Chinese citizen isn't wealthy, hundreds of millions of purchases of small amounts of gold will add up fast to drive world demand higher.

The other Asian giant is India, which incidentally is the largest market in the world for physical gold. The Indian culture adores gold and has long used gold as a key way to store and save wealth after the harvests come in. Rupee gold is up 74% bull to date and is doing really well since the rupee really hasn't risen as much as other currencies. Like yuan gold, rupee gold still has room to rise and remain within its primary bull-market uptrend.

While Indian gold investors are more price conscious than most other countries' gold investors, the demand curve for gold in India is still inverted. The higher the gold price rises in rupees, the more Indians become convinced gold is the way to go to preserve and enhance their wealth. Along with China, India will be the primary driver of physical gold demand as this bull market continues to blossom over the coming decade.

Australia, a major natural-resource-based economy like Canada, has not witnessed new gold highs for almost several years now. The massive 65% gain in the Australian dollar has absorbed much of US dollar gold gains. Back just under A$650 in early 2003 Australia gold was up 38%. Today, even though the recent breakout didn't carry Australia gold up to new bull-to-date highs, the metal is still up 33% bull to date.

Nevertheless, a lot of Australian investors are interested in gold. The Australian contrarians have been buying gold stocks in recent years both at home and abroad and reaping major gains. If Australia gold can get up over A$650 and stay there long enough to convince investors this gold bull is real, then Australian mainstream investors will start chasing gold as well. The current secular commodities bull will benefit Australia immensely.

Like South America, Africa really lacks any impressive currencies. Nevertheless, South Africa remains one of the most economically important countries on the continent. And of course this country remains the number one gold-producing country on the planet, ahead of the US and Australia. Amazingly, due to the rand crash in 2001, rand gold has been in a very distinctive downtrend for years. Gold finally started breaking out this year.

Despite all of this currency turmoil that saw the rand rocket 142% higher and decimate the local mining industry since its costs are paid in rand, rand gold is still up 52% bull to date. This is more than euro gold, more than Canadian dollar gold, and right in line with UK gold. Assuming the rand exchange rate is finally stable again, the rand gold bull market ought to continue ahead unimpeded as global gold prices rise.

While each of these global gold charts is certainly interesting when considered in isolation, I think the most valuable insights emerge when they are considered together. In nine of these currencies gold has risen rather dramatically in recent months and six have blasted up to new bull-to-date highs. These six include the most important currencies in the world, the US dollar, the euro, the yen, and the yuan. While gold isn't hitting new highs in all currencies yet, it is certainly doing it in all the important ones!

These new global gold highs witnessed around the world strongly buttress the case for Stage Two, that gold is decoupling from the dollar and taking its bull market to the next level. This next level is crucial because gold's demand curve among investors is inverted worldwide. Most goods witness lower demand the higher their prices go, but gold and many investments become more sought after the higher their prices climb.

Thus gold buying in China, or India, or anywhere that drives up gold demand will push prices higher around the world. These higher gold prices will in turn spark interest in more investors and lead to even more capital bidding on gold, driving it even higher. The higher its price goes in Stage Two, the more gold demand materializes. Stage Two is a giant virtuous circle where higher prices drive demand creating even higher prices and strengthening the cycle.

Investors all over the world can ride this awesome bull by buying physical gold. Once you have a physical gold foundation laid in your portfolio, you may wish to consider adding riskier but potentially vastly more lucrative gold-based investments like elite gold stocks. The best of the world's gold producers will go up 10x to 100x+ during this secular gold bull creating enormous fortunes for prudent contrarians invested early.

At Zeal we have been actively riding this gold bull by researching and trading the best of the world's gold miners since gold bottomed in early 2001. We have been blessed with countless hundreds of percents in realized gains so far and the best is almost certainly yet to come.

If you want to join us in our carefully researched and timed gold-stock trades, please subscribe today to our acclaimed monthly Zeal Intelligence newsletter. The ultimate gold-stock profits to be won before this bull fully runs its course should be mindboggling.

The bottom line is gold is rising in all major currencies around the world, a telltale Stage Two hallmark. This is only possible when gold is decoupling from the dollar, when gold's gains exceed the dollar's losses. While there are peculiar individual situations where a local gold price hasn't reached new highs yet, in today's major global currencies used by several billion potential investors gold is shining brightly.

There is nothing that begets new gold investment demand faster than rising gold prices, highlighted by today's global gold highs. No matter which part of the world you call home, you can invest in this young secular gold bull and profit tremendously as it continues galloping ahead in the coming years.

Adam Hamilton, CPA
Zeal LLC.com

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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 delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

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