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The new year has ushered in a remarkable and unexpected turn
of events for gold. It is up significantly in four of the seven top
currencies (the euro, British pound, Australian and Canadian dollars), up
respectably in two others (U.S. dollar and Japanese yen) and down slightly in
the last (Swiss franc).
These charts and the significant gains in gold’s value in a
very short period of time demonstrate amply the value of gold as a hedge, not
just against inflation, but against sudden currency devaluation and systemic
financial and economic risks as well. In short, it is important to see
that gold owners in these countries got the protection they sought against
adverse circumstances when they first purchased the metal. In short,
gold has performed as advertised.
Here is the amount gold has risen in percentage terms in the
top currencies:
1.
Euro – up 18.8%
2. Canada $ – up 16.6%
3. British £ – up 13.1%
4. Australia $ – up 12.4%
5. U.S. $ – up 9.2%
6. Japan ¥ – up 6.6%
7. Swiss Fr – down 2.6%
In
the chart form, here is what those percentage gains look like:
Please
note the big spikes in the euro, pound, Canada and Australia dollar charts.
The spiking reaction in Europe, on the surface, appears directly
attributable to the European Central Bank’s introduction of quantitative
easing, but there is more to it than that as explained below. In
Australia and Canada, the plummeting oil price has played a key role in
driving down the two currencies precipitously, and gold sharply higher.
It seems only a matter of time until the central banks in those two
countries introduce their own versions of quantitative easing as a matter of
necessity.
Gold was performing similarly in the Swiss franc until the
Swiss National Bank pulled the rug on its peg – a maneuver that resurrected
the safe haven status of the currency. Though some lament the sudden
policy change as damaging to the domestic economy, Switzerland’s principle
business remains banking and a solid currency lends itself to a growing
deposit base. In the end a strong currency is likely to support the
Swiss economy over the long haul, particularly as the European Union attempts
to print its way out of the sovereign debt problem and underlying banking
crisis.
Gold’s broad rally in 2015, in my view, could very well signal
resumption of the secular bull market that has been at rest for the past two
years. Some will argue that we have seen false starts in the gold price
during this period previously and that this is simply a repeat. I counter
with the argument that none of those rallies were as broadly-based, as driven
by a confluence of seminal events or displaying such sharp out-of-the-gate
trajectories. Make no mistake, though it appears that gold and quantitative
easing might be directly correlated, what is really going on is that both
simply are reacting to the same problem – a bad economy with the
potential for systemic financial and economic breakdown. Central banks
respond by printing money. Investors respond by buying gold.
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