"Last week (May 27), 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 This Week - June 3, 2005)
Two weeks ago, Silver bolted upwards. That was a first "lead indicator" for Gold. Last week, the Euro Gold price broke out as the Euro fell further against the US Dollar and got very close to the all time highs it set three years ago.
Now, specifically on June 10, the Euro Gold price HAS set a new all time high. The two charts below are signalling a potential global currency sea change:
Point and Figure Chart - Gold in Euros - 1 Euro x 3
On Friday, June 10, in the face of a $US index which jumped 0.67 points (or 0.75%) to a new 2005 high of 88.72, the Gold price actually ROSE $US 3.20. This rise, coupled with a $US climb from 0.8186 to 0.8246 against the Euro, saw the Gold price break above the Euro 350 level and go on to set a new all time high of Euros 352.30.
And THAT, we submit to you, is a BIG deal.
The new Euro high for Gold is not decisive yet, it is true. The old high was only slightly below this level. It was set just over three years ago on May 23, 2002 when Gold closed at Euros 350.11. However, the combination of Gold rising against a US Dollar which is itself rising - and, in the process, setting a new high against the Euro - is VERY significant.
Consider first the numerous times that Gold has come close to the Euro 350 level in the three years since May 2002 - only to fall back each time. You can see them on both the charts above. Consider also that Gold's first rise to the 350 Euro level came as it's bull market against the US Dollar was being confirmed. Gold finally broke decisively back above $US 300 in late March 2002. It then began a two month run up against ALL currencies, not just the US Dollar, until late May 2003. From that day to this, Gold's rise has been largely confined to the US Dollar. Gold in terms of other major world currencies has been remarkably flat for the past three years.
Finally, consider this fact. Gold has long since confirmed its bull market against the US Dollar. It has, by contrast, being basically trading sideways against other (non $US aligned) major currencies ever since 2002, shortly after the US Dollar bear market began. If Gold continues to rise in Euro terms above the new all time high level it set on June 10, it will have RE-confirmed its bull market in the other of the two world currencies which are competing for RESERVE currency status.
Right now, with Gold having inched above its previous high in Euros, it is still $US 28.60 or 6.3% below its bull market high in US Dollars. That high was set just over six months ago on December 3, 2004 with a spot future close of $US 456.00.
Gold is down 6.3% from that December 3 $US high. The $US index is up 9.6% from its level on December 3, 2004. And remember, the "trade weighted" basket of currencies on which the $US index is based is heavily skewed towards the Euro, which makes up 57.6% of the index. While China not Europe is the biggest US trading "partner", the Chinese Yuan is not included in the index. That is for fairly obvious reasons, the Yuan has been fixed to the US Dollar for more than a decade.
Ultimately, every holder of financial capital must concern him or herself with the CURRENCY in which the capital is denominated. For private holders of such capital (not Central Banks), the US Dollar has been an increasingly untenable proposition for years now. That has not changed despite the rebound in the $US index over the past five weeks or so. Now, rightly or wrongly, the stability and even the existance of the Euro is being questioned after the Constitutional "no" votes in France and Holland.
The plain fact is that any reputation for long-term stability or retention of purchasing power has long since been lost by the US Dollar. The Euro has built a superior reputation for "stability" on the back of the ECB having held official European interest rates flat for the past two years plus. And, of course, the rise of the Euro against the US Dollar from early 2002 until the end of 2004 didn't hurt either. However, the Euro has not got much of an historical track record, being less than seven years old.
This year, it has been the Euro as the currency showing weakness. And last week, the political affiliation of Europe suffered an unmistakeable setback as France and Holland rejected the EU Constitution. In the US too, the "surprisingly" good set of US economic statistics which were issued throughout May have come to an abrupt halt. Last week there was the abysmal May job creation report - 78,000 new jobs created, more than 100,000 below "expectations. And on June 10, an April US trade deficit of $US 57 Billion was announced - nearly $US 4 Billion above the preceeding month.
So, why does the US Dollar continue to go up? We think that the major reason is repatriation of capital by US financial entities (of all descriptions) in anticipation of an abrupt economic slowdown. This anticipation has been exacerbated in recent weeks with the seemingly inexorable flattening of the US yield curve. This has now reached such a level that Mr Greenspan himself has seen fit to come out with a "this time it's different" statement regarding the effects of a possible inversion of the US yield curve.
Three weeks ago, in the Late May issue (#527) of The Privateer, we referred to a report in the Financial Times which stated that US hedge funds were speeding up their repatriation of capital to prepare for an expected surge in redemption demands. With hedge funds, such redemptions can only be made quarterly, and the next due date is in LATE JUNE.
If this US Dollar surge is, in large part, the result of a repatriation of capital, then the consequences when such repatriation ebbs are going to be dire. Don't forget, the OECD recently forecast a $US 900 Billion current account deficit for 2006. The current deficit is presently running at about a $US 680 Billion annual pace.
Simply put, more and more people all over the world are becoming increasingly uneasy about the future prospects for the global economy, and for the world's paper currencies. That phenomenon has a long record in history, and the end result is ALWAYS a flight of larger or smaller proportions out of the paper currency or currencies in question and into the precious metals in general and Gold in particular.
It is too early to say that this is either starting or sustanable yet. Gold in Euros has only just exceeded its previous highs. The financial potentates are to meet early next month at the G-8 Summit in Scotland. Still, the situation is prime for Gold to re-emerge as a contending world CURRENCY. Watch the Euro Gold price closely, the higher it goes, the more dangerous the situation. And watch the $US Gold price too. It's not every day that you see $US Gold and the $US index go up in tandem, as they did on June 10, 2005.