Gold Breaks Above $850

2009-JAN-25

Last week was a good one for the precious metals, as gold managed to climb back above $850, which has been a barrier for months. From their closing low the week before, gold climbed 11.0% in terms of US dollars while silver did even better, jumping 14.5%. The gains were even greater in other currencies as the dollar generally strengthened during this period.

The same factors continue to drive gold higher. In today's monetary and financial turmoil, people are looking for safe havens, and gold is the safest of them all.

Importantly, the market is starting to differentiate between 'physical gold' and 'paper gold' like certificates, ETFs and other proxies, which is the point of a recent article in The Telegraph in London:
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4177766/Merrill-Lynch-says-rich-turning-to-gold-bars-for-safety.html
Headlined with 'Merrill Lynch says rich turning to gold bars for safety', the article goes on to say:

'Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or 'paper' proxies. Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. 'People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs,' he said, referring to exchange trade funds listed in London, New York, and other bourses.'

I have long been skeptical of the ETFs, and have written extensively about them in the past to highlight the inherent weaknesses of these vehicles. So it is gratifying to see that the market is now differentiating between owning the 'real thing', namely gold, which is a tangible asset, and a paper proxy, all of which are inferior because they come with counterparty risk. It is of course this risk that has people 'genuinely worried', as explained in the article in The Telegraph.

My articles on the gold and silver ETFs are available at the following links for anyone who would like to read them.
http://www.financialsense.com/editorials/turk/2007/0305.html
http://www.financialsense.com/editorials/rubino/2007/0410.html

As currencies bob up and down against each other, they sink against gold at different rates. This phenomenon is highlighted by the following charts.

The weakest currency has been the British pound. So as one would expect, gold looks the strongest against this currency. Not only is gold at a record high, its rate of appreciation is accelerating. Note how the curved green line highlights this accelerating rate of appreciation.

The next weakest currency is the US dollar. Gold made a new record high last March, but remains just below that level. Also, note the green line highlighting gold's uptrend. It too is curved, like it is for the pound, but only slightly so. In other words, gold is appreciating in US dollar terms at a rate somewhat more slowly than it is against the British pound.

Next up is the Euro, which is included above with the Swiss franc for easy comparison. There is a lot of similarity between these two charts, which is not surprising given that the Swiss National Bank largely mimics the monetary policy of the ECB and the Bundesbank before that. But gold is closer to making a new record high against the Euro (and its Deutschemark predecessor) than the Swiss franc, meaning that the Swiss franc is holding is purchasing power better than the Euro.

Last is the Japanese yen, and gold is still far from its record high. The unwinding of the yen carry-trade has strengthened the yen over the past several months, causing the gold price to fall in terms of yen even while it was climbing against the other currencies above. Notwithstanding this setback over the past several months, gold remains within a long-term uptrend against the yen.

What can we conclude from this analysis? Basically, ignore the fluctuations in currencies against each other. These fluctuations are just meaningless noise, which are distracting and can cause one to lose sight of the big picture. Namely, all currencies are being mismanaged; they are all losing purchasing power when compared to gold.