During
late 2008’s unprecedented financial-market panic, gold got something of a bum rap. Since
this metal didn’t soar during the stock chaos like most of its
investors expected, many assume something must be wrong in gold-land.
But gold ultimately did hold its own, up 2.1% in Q4 while the S&P
500 plunged 22.4%.
During
the very heart of the stock panic when gold looked the weakest (under $750),
it was being driven down by a bear-record US dollar surge. A mass
exodus of flight capital fleeing the burning stock markets roared into US
Treasuries for a temporary safe haven. Foreign investors joining this deluge
had to buy dollars first, forcing a mighty dollar rally to erupt that traders
interpreted as a sign to sell gold futures.
I
discussed this temporary panic-driven dynamic in depth back in late October. But a knock-on effect of this episode was a great deal of
distortion, both technically and psychologically. Like everything else,
gold is denominated in dollars. So when an epic anomaly of a dollar
surge snowballs extremely rapidly in a matter of weeks, it is really going to
alter investors’ perceptions of what is going on in the gold market.
Like a
funhouse mirror, gold’s technical action during the stock panic was a
fleeting distortion of underlying fundamental realities. It is hard to understand what gold is really doing without
first exiting the hall of mirrors. This means considering gold’s
Q4 panic action in its long-term context outside of the tyranny of the US
dollar. This is especially challenging for Americans (me included)
since we can scarcely think outside of our lifelong dollar framework.
Over the
years I’ve tried to expand my own extra-dollar understanding of this
secular gold bull by studying its progress in other major currencies.
Since the stock panic’s impact on gold seemed so confounding to those
of us conditioned to think of gold only in US dollar terms, this week I
decided to update our global gold thread of research. Did gold really perform as poorly as we
Americans saw on our dollar-gold charts?
To find
out, I built 10 gold-bull charts denominated in 10 different
currencies. They all represent either globally-recognized elite
currencies or relatively strong regional currencies used by large fractions
of the world’s population. Because local supply-and-demand
dynamics can cause gold prices to vary a bit within each currency’s
sphere of influence, I used forex-implied
gold prices rather than averaging countless series of local-currency
gold-price data.
For the
better part of a century now, the global gold trade has been dominated by the
US dollar. This will change sooner or later thanks to the US Fed trying
to destroy the dollar with exponential fiat-money-supply growth and zero
yields, but it still holds true for now. Because of this, all over the
world the prevailing gold price is a function of any currency’s
exchange rate with the US dollar along with the dollar price of gold.
In
addition to the local-currency gold price rendered in blue, each chart shows
that currency’s exchange rate with the US dollar in red. If
necessary I recast a currency’s exchange rate out of its customary form
so a rising red line always shows strength relative to the dollar and vice
versa. In addition, for comparability all gold prices are units per
troy ounce even if atypical in a particular currency’s
regime. As always, we’ll kick off this exploration with the usual
US dollar gold price as the baseline for other currency comparisons.
American
gold investors can draw this chart from memory. It shows gold nearly quadrupling
in US dollar terms since early 2001, a phenomenal bull over a 7-year span
where the S&P 500 eked out a pathetic 11% gain! This bull has had two stages, which
are quite distinct above. Initially in Stage One, gold was largely
driven by the US dollar bear. But subsequently in Stage Two, investment demand usurped the
dollar to gain gold’s driver’s seat.
Note the
mighty Stage Two uplegs since mid-2005, both of
which erupted while the dollar was relatively flat. And between early
2004 and late 2006, gold soared from the high $300s to the low $600s during a
span where the US Dollar Index merely consolidated sideways. This was the transition between stages as investment demand took over from the dollar bear as
gold’s main driver. This emancipation of gold from the
dollar’s shackles is very relevant today.
Back in
July 2008, the US dollar started rallying. It wasn’t for
fundamental reasons, but because the giant mortgage-backed bond industry was
imploding and bond investors desperately sought the safety of US
Treasuries. This kicked off the massive dollar panic rally in Q3, and
the subsequent stock panic of Q4 accelerated it. Until this anomalous
rally erupted, dollar gold remained strong in the high $800s and low
$900s. As you can see above, all gold’s panic weakness simply
mirrored the dollar’s unnatural strength.
At this
dollar rally’s apex on the very day the stock markets bottomed
in late November, the US Dollar Index had reached levels first seen in early
2004 when gold was near $400. Yet gold didn’t even close
under $700 in 2008’s panic, vastly stronger than the dollar alone would
suggest it should be. Once again this highlights the critical fact that
the dollar is no longer gold’s primary driver even though it can still
temporarily influence gold at times.
Nevertheless,
gold denominated in dollars still fell in the heart of the hyper-fearful
stock panic. But gold’s panic behavior
certainly did not look like this for everyone. Many major currencies
fell much farther than the dollar rose. This disproportionality
drove local-currency gold prices to new bull highs. Gold’s behavior during the stock panic may have disappointed
Americans, but around the world it looked radically different.
Canadian
gold investors didn’t have much to complain about. By early
October, their local gold price had already exceeded its C$1003 high of March
2008 (marked with the green 7 above). The Canadian dollar fell so far
relative to the US dollar that local gold surged despite all the dislocations
in the global currency markets. The Canadian-dollar carnage in this
panic was so bad that it shattered its bull’s secular support that had
held since 2003.
By the
end of 2008, Canadian-dollar gold was again hitting new bull highs. Up
174.9% since this bull began, gold has been a brilliant investment for
Canadians this decade despite the bull market in their currency. This
equates to 0.60x the gains seen in US dollar gold, as the yellow ratio under
the blue gain above shows. And this is very impressive with the
Canadian dollar’s gains running 1.86x as large
as the US dollar’s losses.
So in Canada,
as in much of the world, it wasn’t gold that was weak during the stock
panic but the local fiat currency. Considered from another angle, this
means that gold’s weakness in US dollar terms was actually modest
relative to the US dollar’s mighty gains on the global forex markets. Canadian investors saw a very
different gold picture than we’ve seen in the States, as did those in South Americ a’s leading
market.
The
Brazilian real fell so sharply during the stock panic that it looks like a
crash on this long-term chart. Yet real gold remained very
strong. Not only did it not break below its secular support, but
it rocketed to new bull highs dwarfing those seen in March 2008.
Incidentally, the tops of all the major US-dollar-gold uplegs are labeled in all these
charts for comparison. Green numbers denote higher local-currency gold highs
while red ones show lower ones.
The
Brazilian real is a regional currency at best, and few investors would
consider it strong despite its secular bull. Yet for much of South America, this is how gold’s
performance during the stock panic looked. This will drive all kinds of
new South American interest in gold investing, as nothing sucks in new
capital like dazzling performance. This is exactly what American
investors wanted to see in October and November 2008, a blisteringly fast
gold spike to radical new gold highs.
Unlike
the Brazilian real, the euro is one of the strongest and best fiat currencies
on the planet today. It too got hit hard by the anomalously intense
dollar panic rally. But check out euro gold! Not only did it not
fall far even during the stock panic’s darkest days, but it soon surged
to new bull highs above March 2008’s! And even after hitting the
mid-€600s right away in early October, euro gold hasn’t given
much back since. Even in late December as the stock panic faded, euro
gold was still trading near its previous March highs.
In euro
terms, gold’s new mid-panic highs extended its secular bull since early
2001 to a fantastic 142.5%. This was in the face of a strong euro
secular bull too, where the currency itself was up 90.9% at best. This
just goes to show that even in the second-most-popular global currency, gold’s bull has been outstanding. Since
Stage Two dawned in mid-2005 and euro gold broke out above its old €350 resistance, gold has been one of the best
investments for European investors to own.
In
addition to Europe’s
327m people who view gold through the lens of their euro, hundreds of
millions of more people around the world use the euro as their primary
currency. And this popularity will only grow as the dollar fades from
prominence thanks to the Fed’s madness. For this huge and growing
block of investors that include ultra-wealthy Middle Eastern and Russian
entities (including central banks), euro gold is how gold looked during the
stock panic. And it is pretty darned impressive!
Euro
gold’s strong performance through the most difficult market episode in
modern history will get many more euro users interested in gold
investing. If I could pick a single chart to represent how gold really
performed in the global stock panic in dollar-neutral terms, this euro-gold
one would be it. American investors would do well to consider
gold’s recent performance in euro terms if we want to separate out the
distorting effects of the enormous panic rally in the US dollar.
Britain remains a global financial powerhouse, with London
still the world’s financial capital in some markets including
gold. Yet the stock panic seemed to affect investors holding assets in
the pound sterling disproportionately hard. The pound essentially
crashed during the dollar surge which drove pound gold up to dazzling new
bull highs. How high? Pound gold rocketed to its highest prices
seen since at least 1717 when records started being kept! You
can’t ask for better gold performance than this in a financial panic!
Provocatively
this pound-gold price is extremely relevant. The pound is the
third-largest reserve currency in the world today after the dollar and
euro. It is also the fourth-most-traded currency in the world after the
dollar, euro, and yen. These stellar gold prices are driving huge gold
investment demand in Britain
which ought to accelerate. The more average British investors realize
how well their peers are doing in gold, the more capital they will invest in
it. High and rising prices render assets extremely attractive to
investors.
And
since London
is the center of the world gold trade, the
pound-gold price’s influence extends far beyond the direct users of
this currency. A new gold rush in the UK could have a profound bullish
impact on gold worldwide. It is fascinating to realize just how
different investors who think in pounds perceived gold’s stock-panic
performance than those of us trapped in the fading US-dollar paradigm!
Out of
all 10 major currencies, only Japan
and China
saw relatively poor gold performance similar to the States. In Japan’s
case, its government has been trying to drive the yen down in concert with
the US dollar for years to help its massive export industry.
Nevertheless, the yen got away from it during the stock panic. It just
soared along with the dollar. There is no dollar-yen peg of course, and
the yen’s bull market started way back in mid-2007 a year before this
latest dollar surge erupted.
Interestingly
a sizable fraction of this yen strength occurred after the stock panic
started abating in late November. This suggests the very weak yen-gold
prices in late 2008 were partially the result of Japanese companies
repatriating capital for year-end. In this chart you can see that the
yen tends to rise late in most years. Regardless of its cause though,
the average Japanese investor probably feels worse about gold’s panic performance
than we Americans do. This will not help gold investment demand in Japan.
China saw similar poor panic performance. Of course the yuan was hard-pegged to the dollar until mid-2005, which
is probably not incidentally right when Stage Two of the dollar-gold bull
dawned. Since then the yuan has been rising
in an accelerated fashion against the weakening US dollar. Provocatively
though, since the middle of 2008 this yuan rise has
suddenly stopped flat. This persisted through all the mid-panic
currency turmoil too, which is extremely unlikely unless China has a
new de-facto yuan-dollar peg.
Regardless
of how managed this exchange rate has been in the last 6 months, it means the
yuan-gold price looked nearly identical to dollar
gold’s. So Chinese investors certainly won’t be impressed
with gold’s panic performance either. This is unfortunate since China is the
world’s biggest growth market for gold investment demand. On the
bright side, when US dollar gold runs higher as its fundamentals suggest is inevitable, yuan gold will march
higher in lockstep if Beijing tries to maintain this apparent new currency
peg.
Of
course Indians are collectively the world’s biggest gold investor, so
the rupee gold price is very important to the health of this global gold
bull. Thanks to a rupee collapse during the stock panic to dismal
levels underneath where its secular bull started in mid-2002, rupee
gold has been very strong. In fact, it surged to new bull highs during
the stock panic and ended 2008 near these levels. This will be very
encouraging to Indian gold investors, especially since their own stock market
was ripped to shreds by the global selloff.
During
all this turmoil, India’s
deep cultural affinity for gold investment was strongly affirmed. Gold
remained high and forged higher when all other assets were burning to the
ground. It preserved and grew wealth even while the local currency
utterly collapsed. This can only help future gold investment demand
within the world’s largest gold consumer. The rupee gold price is
an important one to watch thanks to India’s enormous influence
in the global gold markets.
Similar
to Britain, in Australia
gold soared to radical new highs too. Even more impressive, it sustained
stellar new levels leading into year-end even while the stock-panic fears
rapidly bled away. This is dream performance for gold during a
financial panic, just the kind of thing American investors hoped to
see. With their natural-resource-heavy economy Australian investors
have always been more open to gold investing than Americans, and these major
new gold highs will only spur even bigger investment demand.
Also,
like the euro, the Australian dollar has been in a powerful secular bull
market thanks to the US dollar bear. Yet Aussie gold has still climbed
189.2% at best despite a 102.9% rally in the Australian dollar. And
while you might think Aussie gold will collapse as the local currency recovers
from its panic selloff, this isn’t necessarily the case in Stage
Two. If global investment demand drives up gold prices faster than the US
dollar falls, highly likely, then gold in Australian dollars
shouldn’t give back much of its panic spike.
Not only
is South Africa a top
global gold producer, its currency is the most important in Africa.
But this isn’t saying much, as it has still been weak since early 2005
despite the US dollar bear. This has helped drive gold in rand up to
the biggest bull-to-date gains seen out of all 10 of these currencies.
Already weak, it shouldn’t be surprising that the rand crashed yet
again in response to the panic-driven US dollar rally. This drove gold
to fresh new all-time rand highs which will encourage South African gold
investment.
Ten
charts is a lot to digest in one sitting, I know. But to understand how
gold really did during late 2008’s devastating stock panic, you really
need to consider all these currencies concurrently. The takeaway is
gold’s panic performance ranged from excellent to spectacular in
7/10ths of these currencies which include the very important euro and British
pound. Only the US, Japan, and China saw local-currency gold
charts that looked weaker than investors hoped during the panic episode.
So
unlike lamenting American gold investors, the great majority of the
world’s investors witnessed strong gold performance in recent
months. Since demand for any investment grows with higher prices, gold
investment should accelerate substantially in 2009 as global investors see
how gold could have protected and grown their capital even while everything
else was melting down around them. You couldn’t hope for a better
advertisement for the merits of gold investing.
The
sharp US dollar rally that drove the poor gold performance in the US and China
(and maybe Japan)
was an unsustainable anomaly. Acute panic conditions generating extreme
fear spawned it, but this fear is abating and those panic conditions no
longer exist. And the US dollar is already reflecting this as its
panic-driven rally started failing the day the US stock markets bottomed.
As more flight capital emerges from its temporary hideout in US Treasuries,
this dollar weakness will probably persist on balance.
For many
structural reasons totally unrelated to the stock panic, gold’s fundamentals remain awesomely bullish. Its strong performance during the
stock panic in most of the world is only icing on the cake that will drive
additional investment demand. And while gold itself is destined to head
much higher in the coming years, the stocks of its producers should far exceed
its gains. They were driven to ridiculously silly levels in the stock panic and have yet to properly reflect today’s
gold prices, let alone gold’s future potential.
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the next big upleg in this secular gold bull.
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The
bottom line is gold’s performance during late 2008’s epic stock
panic did not look anywhere near as bad to most of the rest of the world as
it did to American investors. Unfortunately our dollar-centric
worldview greatly distorted gold’s true performance. It is a big
mistake to read too much into dollar gold’s recent technicals
that were driven by an incredibly anomalous panic-driven dollar surge that is
already reversing.
Rather
than dampening investors’ enthusiasm, gold’s new bull highs
achieved in the midst of the panic in much of the world will only accelerate
gold investment demand. Post-panic, investors everywhere are much more
conscious of risk and diversification. Increasing numbers will begin
the time-honored best practice of always having
some material fraction of one’s total investment portfolio deployed in
physical gold.
Adam
Hamilton, CPA
Zealllc.com
January 9,
2009
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