Look beyond the US Dollar to see what's really happening in the Gold Market
It has become a knee-jerk reaction for investors to look at the Gold Price in terms of the US Dollar alone, and for commentators to only follow its moves in that currency. There is good reason for this, of course, for the US Dollar is the global reserve currency at present – even if it is beginning to look of dubious value today.
Why don’t we measure gold in a strong currency such as the Euro? Although that is an ‘up and coming’ reserve currency, the Euro has not taken a sufficient hold of the world’s monetary system to be accepted as the Dollar's equal. And so, for now, the Gold Price in Euros is less closely followed.
But gauging the Gold Price in the US Dollar alone is misleading, because the Dollar is losing value against its peers in the world of paper money, and so is not measuring the real rise or fall of gold. To see if we really are watching it go too far, too fast in real terms, we need to get a perspective by looking at the Gold Market through the Euro. We also need to look at the oil price – a firm measure of the Dollar's purchasing power that springs directly from its role as the world's No.1 reserve currency.
So we went back to the beginning of this year, 2007, to compare Gold Prices in the two main global currencies. This would give us a better, more balanced view of what is actually happening in this market. It emphasizes the correctness of the approach we have taken to gold in our publication, the Gold Forecaster, to date.
* In our January 5th issue, we recorded the Gold Price at $620 per ounce. By the 9th Nov., it was $840.65 – a rise of +35.59%;
* Measuring the Gold Price in Euros, it began the year at €475.29. On 9th Nov. it was €573.04 – a rise of +20.57%;
* Oil at the start of January traded at $55 per barrel, rising to $95 by Nov. for a rise of +72.72%;
* In Euros, the oil price moved by a still-dramatic 54%, up from €42.01 to €64.76 per barrel.
Many commentators are now concerned by the sharp rise in both Gold Prices and in oil, and they are backing off their positions. Some sold half their positions one to two weeks ago. However, a look at these moves helps us to keep our balance. Because Gold Priced in Euros, as you can see, has had a healthy rise, but not one to get overly excited about – and certainly not one to prompt an exit for fear of "speculative excess". What we see in clear perspective is the fall in the value of the Dollar. Its weakness moves to center stage when we view Gold in Euros – and the rise of the Gold Price becomes obvious.
The same applies to pricing oil in the Dollar, since it also looks (somewhat) more bearable in the Euro. Indeed, most of the drama dissipates when we look at oil and Gold Prices in the European single currency. Perhaps the rise in the oil price tempts us to think it has gone too far too fast, until we look at the fundamental picture.
We should be asking, not what is the gold price, but "What is the Price of the Dollar?" Is it now 1/840.65th of an ounce of gold? The rise in the Gold Price reflects the extent of the damage done to the world's confidence in it. The world’s main reserve currency just should not show a 15% decline in 10 months, if it is to continue to hold its position. So many factors have made the Dollar hemorrhage this year – and they are structural problems confirming that the Dollar may bounce but certainly not recover.
It is only a matter of time before this is realized and the future darkens as damage control measures are put in place to protect each individual part of the global money system. When the Chairman of the Fed tells us that we should by American goods and the fall of the Dollar won’t affect you, he is waving the flag only. If the United States were self-sufficient in all goods and resources, he would be right, but the US is not, for two reasons: crude oil and cheap Asian imports.
These imports ensure that the US economy is to some extent dependent on outside supplies for its own well-being. So in the US it is correct to price gold and oil in the Dollar because that is the local price. But outside the US other local currencies reflect the price of gold better. The lower the price rise, the healthier the economy of that particular country. And looked at in the Euro, we are just beginning to see gold rise, a rise that despite its hitting historic highs has a great deal of distance to go, which is precisely why we follow the Oil:Gold ratio in Peter’s work here at the Gold Forecaster.
A 20% rise is good but far from spectacular. The oil price rise is spectacular, but it is sobering to be told that the oil price is unlikely to fall below $80 – meaning a 45% rise on the year. Gold has a lot of catching up to do in comparison to the price of oil! We do believe that gold will break out against oil and take the ratio well into two figures again, so be ready for a real rise in the Gold Price, taking it far closer to oil’s performance than we are seeing yet.
Oil meanwhile is being called ‘toppy’ as it reaches out for $100, then falls to $92 per barrel. But with the Opec oil cartel making it clear that no more increases in oil supply are on the table, three figure oil prices lie ahead. Again, fundamentals kick in with supply problems – and a tipping of the demand/supply balance tells us we should get used to a world of $80 to $100 oil with ‘spikes’ to higher levels. The key to understanding the Dollar, oil and the Gold Markets is to keep one’s eyes on the future, not on the past. This is a very different world to any we have ever seen before!
As in India until last week, high Gold Prices weighed on Dubai's gold sales in October. In the United Arab Emirates, the capital of Abu Dhabi – with a much smaller market than Dubai – saw gold sale volumes drop by 15% in October, while the sales value rose 10% on high prices. We believe that so far in November, the same is happening as prices went through the roof, depressing the actual value of total sales by 6% from a year earlier. They had expected a 30% rise in Gold Sales value.
The Muslim holy fasting month of Ramadan ended in mid-October with a feast, during which many couples marry. Ramadan helped gold sales at the beginning of October, but then sales dropped sharply with the recent price hikes. On the developed side of the world, a glance at the Exchange Traded Funds in gold shows that demand has not been that strong in the last couple of weeks. (It fell by more than six tonnes in fact). The Gold ETF Funds have not bought so much that they are driving Gold Prices higher either – so who is actually doing the buying that is driving gold so high?
The biggest part of the latest pullback, in fact, has come from institutional fund selling on the Comex gold futures exchange. So where did the demand come from that took the price of gold to such a high level? We got a clue from the timing of the price rises. The bulk of strong gains happened before either London or New York opened. This tells us the buying came from the Middle and Far East – or by developed world buyers placing their orders outside their own time zones, perhaps.
If it was not at retail level, then could it have been at Central Bank level? We know that Japanese investors took a signal that the time to Buy Gold was now, according to certain technical data they concocted for themselves. Then Sovereign Wealth Funds – effectively the pension funds now run on behalf of export-rich national governments –have become and will continue to be buyers of gold. Some of these are so large that just a small portion of their money could swamp the Gold Market. If Central Banks such as China or Russia are also buyers, it will impact gold prices.