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The gap
between gold in dollars vs other currencies has
widened...
MANY factors determine the gold price
– some transient, some more sustained.
By
far the oldest driver of gold demand is gold's role as a monetary metal.
With
that in mind, let's take a look at how the yellow stuff has fared so far the
year against its newer upstart rivals, the paper currencies.
Here
at BullionVault our gold price chart tracks the
spot market gold price tick by tick in seven major currencies. Of these
currencies, only two have "beaten" gold over the first half of 2011
– that is, the gold price has gone down in those currencies.
One,
the Swiss Franc, is not a huge surprise. The Swiss does, after all, have a
reputation as a "safe haven" currency – though whether it
deserves this reputation is open to question.
But
the other "gold-beating" currency may surprise you. Because that
currency is the Euro. Yes, the permacrisis,
sovereign debt-riddled Eurozone has actually seen its currency rise in value
against gold since the end of last year.
Of
course, the Euro gold price saw an especially big run up in late 2010, so it
was starting from a higher base. And, as you'll see below, gold did set a
record Euro price at the London Fix.
Furthermore,
looking over the last five years, the gold price in Euros has shown a steady
uptrend, suggesting investors would rather hold gold bullion than paper, even
paper with pretty colors on it.
Now
we come to the five currencies that have lost ground against gold this year.
The commodities-backed Australian Dollar put in a creditable performance.
Australian investors were paying only 0.9% more for their gold at June's end
than they were at the end of last year.
The
Pound Sterling gold price rose 2.1% in the first six months of the year
– again coming off the back of a big run up at the end of 2010 –
while the Canadian Dollar and Japanese Yen gold prices saw 3.1% and 4.8%
gains respectively.
Now
we come to the real dog of the bunch, and the front runner at the half-way
point of 2011's ugliest currency competition.
Yep,
you guessed it – it's the US Dollar.
The
US Dollar gold price rose 6.1% on the spot market in the first half of 2011
– another way of saying the greenback lost 6.1% against the world's
oldest form of money. This despite the pressures facing its largest
competitor the Euro.
It
is worth regularly reviewing the gold price in different currencies –
gold does, after all, have monetary properties, so it's a good way to tell if
a price move is because of one currency's weakness,
or a broader rise or fall against all paper money.
Let's
now look at how the gold price has done on the London Fix – the price
that gets entered into the history books.
Based
on the London PM Fix – the global benchmark for wholesale pricing and
reserves valuation – gold in the first half of 2011 set new all-time
highs against the US Dollar ($1552 per ounce), Euro (€1076), Sterling
(£962), South African Rand (ZAR 10,757), Canadian Dollar (C$1518),
Chinese Yuan (over CNY 10,000 per ounce), Indian Rupee (INR 22,736 per 10
grams), Korean Won (just shy of 1.7m per ounce) and Mexican Peso ($18,349 per
ounce).
Investors
in Australia, Brazil and Russia missed out this spring, but Japanese
gold-owners got a fresh 28-year high above ¥4030 per gram.
The
Dollar, though, sticks out. Another way of seeing the Dollar's terrible
performance against gold is to compare it against BullionVault's
Global Gold Index.
Global
Gold Index maps the price of gold against the world's top 10 currencies by
size of issuing economy. So it's led by the Dollar, but also includes a hefty
weighting to the Euro, Yuan and Yen price of gold, plus the British Pound,
Canadian Loonie, Aussie Dollar, Indian Rupee,
Brazilian Real and Russian Rouble prices too.
And
just like the US Dollar price, BullionVault's
Global Gold Index hit a new record high on June 22nd. But when measured (and
thus rebased and weighted to 100) from the start of the century, gold now
shows a substantially sharper rise vs. the Dollar than against the world's
money at large - an outperformance of more than 13 percentage points, in
fact, for a total return of 452% since New Year 2000.
The
gap between the US Dollar – when viewed through the prism of gold
– and the rest of the world's currencies yawned in spring 2011 to its
widest level since August 2008...just before the end of the world (aka Lehmans' collapse), as you'll no doubt recall.
All this with Currency
No.2, the Euro, facing a genuine debt crisis and/or disintegration. Good job
QE2's just ended, eh? When real headwinds blow for the gold price, they'll
blow from the East, not from falling gold
ETF sales...
So
after The
Economist and Harper's both tried (and failed) to tar all gold investors with the same
"idiot gold-bug" brush, trust our friends at the Financial Times to mistake Western
investment funds for the entire global gold market.
The
volume of gold held by gold ETFs - those stock-market-traded trusts backed
by physical bullion - has dropped 0.7% so far in 2011 says the FT,
quoting research from Daniel Major at Royal Bank of Scotland. That drop of 16
tonnes took global ETF holdings to 2,244 tonnes by end-June.
"RBS
also highlighted a significant shift in positioning in the gold futures
market," the FT goes on, "with a 17% drop in the net long
position [of bullish minus bearish bets] held by speculators on the Comex exchange in New York."
As
a result, RBS's Major questions the "willingness of western financial
investors to keep buying gold," because they "might be approaching
saturation point." But even putting the imminent Eurozone default and US
debt-ceiling ruckus to one side, however, it's still a big jump to conflate
any such loss of Western appetite with "the decade-long rally for the
gold market...nearing exhaustion" as the FT
then does.
First,
US gold futures only set the price at the margin. Three-month prices will of
course affect what you and I contract to deal at today, but it's the
underlying trend in physical bids and offers that sets the longer-term move.
Second,
gold
ETFs pretty much peaked in summer 2010, as the neat Investment Weekly from the VM Group shows.
Yet the gold price has since gone on to set fresh record highs against all
major currencies bar the Swiss Franc and those of the big commodity-producing
economies. What's more, those ETFs are a distinctly Western phenomenon,
signally failing to take off in the No.1 Indian market and not (as yet)
available to world No.2, China. Yet between them, those two accounted for 57%
of global gold demand in the first quarter, according to the World Gold
Council's latest Gold Demand Trends report. Growing their
physical purchases by more than one-eighth from Q1 2010, India and China
hiked their share of global demand from 55%.
More
notably still (and again according to Gold Demand Trends), global
first-quarter demand for gold bars set a new all-time record. Previous WGC reports called this segment "Bar
Hoarding", and it referred specifically to Asian investment demand.
Added together, gold bar and coin demand hit their 2nd highest
quarterly total, meantime. Whereas ETF holdings - overwhelmingly US and West
European; yet to take off in Asia - shrank by 55 tonnes.
Now,
none of this means the physical gold market doesn't face headwinds. It's just
that, when they blow, they'll blow from central banks raising interest rates
to defend the value of cash, and they'll have to blow hardest from the East.
"Our
guys can get 7% on a 3-month deposit," as the head of one major
bullion-bank's trading team told me of his Indian buyers last month.
"Why would they buy gold?"
China
too has been busy raising interest rates - Kryptonite to the gold price, but only if
cash-rates overtake inflation. China's hike on Wednesday, the fifth since
October, took deposit interest rates to 3.5%. Official data says inflation is
two percentage points higher, and there's cause to think it's much
under-stated, says Simon Hunt (of the eponymous Strategic Services), writing at MineWeb and pegging
domestic Chinese price inflation nearer 11% per year. Such clear, drastic
devaluation of money's purchasing power makes buying
gold an obvious and historically proven defense. Indian deposit rates, on
the other hand, now stand almost level with official (down to a 6-month low
of 8.72% in May; savers can get 8.25% on a 1-year
deposit at HDFC, India's second-largest private-sector bank).
So, our man with the Mumbai hotline says, bullion imports have flat-lined.
Still,
we are bang in the middle of the typical summer doldrums for Indian gold
buying. And looking ahead, CLSA's Christopher Wood - speaking to Euromoney's Institutional Investor - reckons that
China has "now finished tightening", while India has already "over-tightened" says former Merrill Lynch
chief economist Richard Bernstein.
"How
do you know when the central bank has tightened too much?" Bernstein
asked the Reuters 2011 Investment Outlook Summit last month.
"It's when the yield curve inverts [with longer-term bond yields falling
below short-term interest rates]. Historically that has been a fantastic
indicator," pointing to the very economic bust which credit-cooling rate
hikes are aimed at avoiding.
Big
picture, it's these numbers - interest rates and inflation, not least in the
world's No.1 and 2 heaviest markets - which matter to gold's underlying
trajectory. But for all-too many Western analysts and reporters, East is East
and West is all.
Adrian
Ash
Head
of Research
Bullionvault.com
You
can also Receive
your first gram of Gold free by opening an account with Bullion Vault : Click here.
City
correspondent for The Daily Reckoning in London, Adrian Ash is head of
research at BullionVault.com
– giving you direct access to investment gold, vaulted in Zurich, on $3
spreads and 0.8% dealing fees.
Please
Note: This article is to inform your
thinking, not lead it. Only you can decide the best place for your money, and
any decision you make will put your money at risk. Information or data
included here may have already been overtaken by events – and must be
verified elsewhere – should you choose to act on it.
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