It is the dog days of summer. The metals are trading below their recent
highs while the miners continue to be on the cusp of their next leg higher.
In any event we remain bullish as we expect the next big move to be higher
not lower. One reason, among many is Gold remains strong against foreign
currencies and that often is a leading indicator for the sector at large.
This is something we track often and we wanted to provide an update during
the slowest period of the year.
In the chart below we plot Gold against foreign currencies and Gold in
normal, US$ terms. To be clear Gold against foreign currencies (Gold/FC) is
Gold against the currency basket that comprises the US$ index. Since the new
millennium Gold/FC has been an excellent leading indicator for the sector.
Note that Gold/FC has made new highs ahead of Gold and made positive
divergences before the three most important lows of the past 16 years (2016,
2008, 2001). In fact, the action from 2014-2015 shows strong similarities to
1999-2000. Moreover, note that at its peak a few weeks ago, Gold/FC was
within 8% of its all time high. That is the equivalent of nearly $1750/oz in
US$ terms.
In the next chart we look at different iterations of Gold against foreign
currencies. The top plot is the same version shown above while the middle
plot shows Gold against the US$ trade weighted basket. The bottom plot shows
Gold against emerging market currencies. In every case Gold remains firmly in
bull market territory and stronger than Gold in US$'s.
Tracking Gold's performance against foreign currencies is essential as we
can glean quite a bit more information about what is really going on in the
market. Many newsletters purporting to be analysts fear monger over the stability
of the US$ as a reason for people to buy Gold. However, note that the US$
index is essentially flat compared to 10 and 20 years ago while Gold
denominated in any and every currency is much higher.
In other words, if Gold is going up only because of a falling US$, that is
a US$ bear market, not a Gold bull market. A Gold bull market is Gold rising
against the majority of currencies. In the same vein, a Gold bear market is
Gold falling against the majority of currencies. The charts show that
actually ended well before the final low at the end of 2015.
On the mining side, most Gold and Silver comes from outside of the USA and
many (but not all) companies are exposed to foreign or local currencies and
not the US Dollar. Many companies in Canada and Australia bottomed a full
year ahead of the sector because the Gold price in those currencies was very
strong (even though Gold in US$ had yet to bottom).
Summing it up, Gold's strength in foreign currencies confirms its global
bull market status and provides a hint that more gains for Gold in US$ terms
are likely ahead. We view any weakness in the weeks ahead as a buying
opportunity.
