Last week, we put Gold and silver bar charts up at this page and wondered out loud if Gold was about to follow Silver higher. As it happens, Gold DID follow silver higher, specifically with the $US 7.40 leap to $US 422.70 on June 2. You can see this turnaround on the $US Gold chart above. But here's an even more interesting, and potentially volatile, chart:
Gold in Euros - 1 Euro x 3
As you can see, this chart goes back to late 2001. And as is labelled on the chart, the all time high for Gold in terms of Euros is Euro 350 set way back in early 2002, just as the US Dollar bear market was beginning. Over the past week, Gold has jumped 12.40 Euros. Even more important, the price is now just over 1.0%, or Euro 3.71, below its all time high set a little over three years ago.
On the surface, the reasons for this are pretty obvious. Over 2005 thus far, the Euro is down 9.68% against the US Dollar. Gold is down 3.35% thus far in 2005 against the US Dollar. It is up 7.01% against the Euro. Actually, over 2005 so far, both Gold and the US Dollar have gone up against the Euro, and thus far in the year, the US Dollar is "winning".
The lastest blows to the Euro have, of course, been the (universally expected) no votes on the European Constitution which took place in France on May 29 and in the Netherlands on June 1. Since the Constitution had to be accepted unanimously, this puts the political project which is the EU back on the drawing board. It also, according to many Anglo-Saxon pundits on both sides of the Atlantic, puts into question the entire structure of the European Union and the European Central Bank with its "ersatz" reserve currency, the Euro. What is clear so far is that as a result of these two "no" votes, the Euro has tumbled by 3.0%, one-third of its current 2005 fall against the US Dollar, over the past week.
This commentary is not the place for us to go into detail about the recent developments with the Euro and with European Constitutional teething troubles, we do that in the early June issue (#528) of The Privateer - published on June 5. It is, however, a well known fact that the Euro has long been seen as the biggest potential challenger to the US Dollar's long-cherished role as the world's sole reserve currency. It is also a well known fact that for the last year at least, more and more world Central Banks (notably Asian Central Banks) have been acting on their repeatedly announced plans to "diversify" their reserves.
What is also significant is that while the US Dollar might be winning the war, at least at present, on the currency market floors, out in the real world, the situation is quite different. Here, for example, is a May 27 wire story from Knight Ridder titled:Paper euros bucking the U.S. dollar trend. The most notable claim in this story is that by January next year, the amount of paper Euros in actual circulation worldwide will exceed in value (at present exchange rates) the number of US Dollars in circulation.
It is not only in the basements of Central Banks that the Euro is gradually eating into the territory once occupied by the US Dollar, it is also on the streets of the world in terms of actually circulating cash currency. The Euro has only existed as a currency at all since 1999, and as a circulating cash currency since the beginning of 2002. The beginning of 2002 was also the beginning of the long US Dollar slide, the slide which has been reversed (for how long?) over the first half of this year.
Gold, in $US terms, bottomed for a second time (the first was in August 1999) when it hit the $US 255.60 level in April 2, 2001. On the same day, the Euro Gold price was 290.50. Gold hit its bull market high (so far) in $US terms on December 3, 2004 when it closed at $US 456 - up 78.40% from April 2, 2001. The Euro hit its bull market (and all time) high way back on May 23 2002 (more than three years ago) when it closed at Euro 350.11 - up 20.52% from April 2, 2001.
As of June 3, Gold closed at $US 423.70 and Euros 346.40. In $US terms, Gold is 7.08% below a bull market high it set six months ago. In Euro terms, Gold is 1.06% below a bull market high it set just over three years ago.
Gold is thus on the verge of breaking up into uncharted territory, not in US Dollars, but in Euros. A stable US Gold price and a further weakening of the Euro against the US Dollar would do it. A rising US Gold price while the US Dollar and the Euro track at present exchange rates would do it. A situation in which both Gold and the Euro are rising against the US Dollar, but Gold is rising faster, would do it. So would a situation in which Gold and the Euro are falling against the US Dollar, but the Euro is falling faster.
For most of the period between late 1997 (when Gold fell below $US 300) and early 2002 (when Gold consolidated back ABOVE $US 300), Gold was stable against the US Dollar. For the few months in 2002 before the Euro Gold price peaked at Euros 350 in May, Gold was rising against ALL major world currencies. In the period between May 2002 and the end of 2004, Gold was rising against the US Dollar and the currencies of most of the major Asian trading partners of the US. Gold remained fairly stable against other major world currencies.
This year, until the end of April, Gold was remarkably stable against all major world currencies, even the US Dollar given the rise of the Dollar since the beginning of the year. At the start of the year, Gold was $US 438.40. At the end of April, it was $US 436.10 and Euros 337.5. A month later on May 31, it was $US $US 416.30 - and Euros 338.20 May has been the BIG month for the US Dollar, with more than half the gains made by the $US index since the start of the year having been made over that month.
The climax of the US Dollar rise so far has come in the wake of the Constitutional referendums in Europe, notably the no vote by the French on May 29. Coincident with that has come the peak of the unbroken string of "surprisingly strong" US economic and financial statistics which were a feature of May and which led to the big upmove on the Dollar (and on most US financial markets).
That situation has already started to turn around. The initial break came with Gold's sudden surge on June 2, as traders found themselves very impressed with the resilience of the $US Gold price in the face of the European "no" votes. Then, on June 3, came the first piece of US economic data for the month, a May employment report which was more than 100,000 below "expectations and, at 78,000 new jobs created, the smallest such number since August 2003.
Right now, there are two competing "world currencies" as far as the financial markets are concerned. These are the US Dollar and the Euro. If Gold breaks out to new highs against the Euro in coming days or weeks, there will be THREE. "Confidence" in the Euro has been shaken by the no votes. "Confidence" in the US Dollar is strictly a currency trading phenomenon, a short-term go with the flow to make a buck item on the world's currency floors.
As you can see from the Euro chart above, Gold has tried repeatedly and failed to break the Euro 350 level over the three years since its May 2002 highs. If it fails again here, it will only be because the Euro recovers against the US Dollar, as was the case in all the previous Euro Gold forays up towards the Euro 350 level. If Gold DOES break out above that Euro 350 level, it will have taken the necessary step towards entering the mainstream as an alternative world CURRENCY.
Either way, the situation is NOT rosy for either of the leading world paper currencies. Don't forget, the Euro is a PAPER currency, it is NOT redeemable in Gold. It is time to start watching the Euro Gold price very carefully indeed. A breakout here will signal a future breakout against the US Dollar. More important, it will signal the beginning of an ever widening perception on a global scale that Gold must be considered, along with US Dollars and Euros, as a means of capital preservation.
The consideration of Gold's role as an actual MEDIUM OF EXCHANGE will come later. What we are on the verge of now is a necessary first step.
