But the most fundamental driver is monetary devaluation.
There are plenty of examples which show that gold denominated in currencies that devalue, moves significantly higher. Think of recent cases in 2014 like the ones we wrote about:
- Emerging markets devaluations like the ones in Turkey and Venezuela – read Gold Price Exploding In Emerging Markets
- Ukraine’s currency devaluation – read Gold Price In Ukraine 75% Higher In 2014
- Argentine’s near hyperinflation – read Gold Trading At All-Time High In Argentine’s Currency
The examples are related to developing markets, which is not too relevant to most of or readers. So let’s examine the situation of the major currencies. The first chart shows the price of 8 major currencies since June of this year. It is not difficult to spot the trend. The US Dollar is the big winner of the last months, and, unsurprisingly, the Euro is the big loser. Now, this is not to be confused with central bank language, as in this world of currency wars, a weakening currency is considered to be a positive for its country or region. So, Mr. Draghi is probably looking at a weakening Euro as a positive development, no matter if Europeans are losing purchasing power.
As the above chart points out, the US Dollar has rallied significantly since July of this year. Consequently, gold has come under pressure, as the yellow metal has gone from $1,340 an ounce in July to $1,251 today. At least, that is what we read in mainstream media.
But here is the key point. Gold has come down in US Dollar terms, but not in Euro terms. So, in other words, Euro gold has held up much better than Dollar gold. Let’s look at the evidence.
The evidence of the above statement is visible in the gold charts of last 5 days. The first chart shows Euro Gold since past Thursday, the second one shows Dollar Gold. It is no coincidence that Mr. Draghi announced his 1 trillion stimulus on September 4th. While it is not visible in the Dollar chart, it is crystal clear in the Euro Gold chart when he announced it.
Let’s take a larger timeframe: 1 month. The first chart below shows Euro Gold, and the price action looks quite balanced. The second chart, however, reflecting Dollar Gold, is not very constructive.
Dan Norcini, professional trader since 4 decades, has put it nicely on his personal blog: “As far as Europeans are concerned, an interest rate environment such as the ECB is creating, is a two-edged sword. On the one hand, it lowers the opportunity cost of holding gold since bonds there pay next to nothing and thus incentivizes ownership of gold. On the other hand, the stronger Dollar (via weaker Euro) raises the price of the metal and thus makes it more expensive to buy and own. That is why one must view the chart to gauge which view will dominate.”
Although one day or one week does not make a market, it seems obvious that a potential trend is in the making: Euro Gold is decoupling from Dollar Gold. It is too early to confirm a trend change, but it is worth monitoring the evolution closely.
Norcini added a longer term chart, which shows that Euro Gold is range bound. There is a probability that Euro Gold could break out, given that it will overcome the magic €1000 barrier.
The moral of the story is to always remember to put a gold price in its proper perspective. The Europeans holding physical gold are, for the time being, protected from their central banking policies. On the other hand, Americans, with a strengthening US Dollar, are subject to lower gold prices, at least in the short run. The same idea applies to the long term; it is up to the reader to check the long term charts, both for the Euro and US Dollar, to get some evidence of gold’s protective value.
This article is brought to you courtesy of Gold Silver Worlds, who advocates to own physical gold and silver outside the banking system.