(January, 2004)
IS THERE A “NON-DOLLAR BULL MARKET” IN GOLD?
Chris--Is there a currency basket where the value of gold is measured against the major world currencies—US$, Japanese Yen, British Pound, Euro and some of the other minor government currencies of gold producing countries? In recent months gold has risen relative to the US$ and dropped against other currencies. . .
A bull market in gold can only continue if the price of gold rises relative to the majority of world currencies. Otherwise, gold just keeps playing musical chairs in cadence to the gold-currency positions and Uncle Al. Uncle Al can end the bull market in gold when the Fed wishes to strengthen the dollar. Then the hedge funds now selling/shorting dollars and buying gold will put everything in reverse—and among other things, gold will fall back down.
Your e-mail makes a good point. As I’ve said myself lately, virtually all of gold’s rise of late—certainly, since breaking above $400.00 per ounce—has been due to the weakening dollar. And as you point out (and I’ve received a few e-mails on this recently) gold does not look nearly as strong if you price its rise in competing currencies. Though, here, there is a mixed bag.
Of the major currencies, the euro has done the best against the dollar. Thus, gold’s bull market is relatively less inspiring when you look at it as denominated in the current “King of the Hill” in the currency markets. But if you look at this chart covering the last several years, you see that gold has still been a profitable bet for even those using the new currency. Only in the last two years—and especially in 2003—did the euro’s appreciation versus the greenback put a damper on the euro price of gold. But by no means did it kill the bull market for gold, even as measured in euros.
Things look decidedly better for the Japanese, whose yen has appreciated by much less against the dollar due to the Japanese authorities’ massive intervention efforts to keep the yen’s rise at least somewhat in check. Still, the gold price as denominated in yen has only just now returned to its peak of about a year ago. Here, too—in the end—a longer-term chart would reveal the same thing as it does for euro owners of gold: a bull market.
It is the somewhat “lesser” currencies (no offense intended) that show the worse effects of U.S. dollar weakness and their own strength when you look at gold in their eyes. For example, here’s Canada. The rise in gold’s price as measured in the currency of our Neighbor to the North was doing quite nicely until the last year. Then, the loonie took off, as international currency traders added it to their shopping list of what currencies they wanted to own after selling or shorting U.S. dollars. Thus, in the Canadian dollar, gold looked quite unappealing for most of the year, jumping anew only in the last couple months.
The biggest horror story of the last couple years has been gold’s behavior versus the South African rand. You need look no further than this chart to understand why shares of South African gold producers—fundamentally cheap based on their reserves though most may be—have been laggards in what for us has been a strong bullish move for the yellow metal. As the rand started to appreciate versus the dollar in 2002, gold’s move higher that year was pretty much negated for South Africans.
2003 was flat ugly, though. Gold bugs would be singing a different tune right now if their favorite metal dropped 15% in value during all of 2003. But that’s exactly what happened to gold in rand terms, as that currency surged by 70% at one point against the dollar. Now you know why a number of South African gold producers have been reducing activity, laying off miners, and otherwise crying the blues.
In the end, looking at this array of gold-related charts, we still come away with a picture of a bull market in gold which—depending on which ones we look at—started anywhere from 1999 (in euros) to 2001 (in dollars.) In the grand scheme of things, I don’t expect that to change; though transient anomalies from time to time in different nations could translate into periods where demand shrinks or surges in that particular location based on the current price. Longer-term, I think that gold’s bull market in pretty much all currencies will continue.
To me, the most important aspect of understanding all this is to be able to distinguish between those mining companies whose profitability will be adversely impacted by these currency considerations, and those which won’t (at least as much.) Personally, I think investors in some fairly popular gold producers have a rude awakening coming as fourth quarter and yearend results come out for 2003, revealing that gold’s strong move in 2003 didn’t mean squat for many companies’ bottom lines.
GINNIE MAES AND TIPS
Chris -- Regarding two positions I have in mutual funds: Inflation-indexed Treasuries and Ginnie-Maes....In light of future rising interest rates, Ginnie Maes would certainly be a loser? How would you expect inflation-indexed Treasuries to perform?
As you suggest, Ginnie Maes would be a “no-brainer.” As with most fixed-income products, the principal value of your Ginnie Maes would go down as long-term interest rates rise. So, together with longer-term Treasuries, I wouldn't want to be in Ginnie Maes or any similar mortgage/agency debt.
As for TIPS (Treasury Inflation-Protected Securities) I have little more regard for them, though if government bonds were to generally decline, they would hold up relatively better. Even TIPS would be likely to have downward pressure on their principal value if market rates were rising; the only distinction, I think, would be that they would decline a bit less than non-indexed Treasury securities.
Being linked to a grossly
understated measure of “inflation,” I don’t think what pittance of a
gain you’d be credited with each year on TIPS remotely addresses YOUR
true cost of living. Thus—though by the brokerage industry’s definition
they might be deemed a “safer” place for your savings—they wouldn’t be
one of my choices for a vehicle to maintain or grow purchasing power on
investments. At the present time, at least, I think it’s better to look
at non-dollar denominated savings vehicles, foreign government debt, and
shares in the better commodity producers; all of these have by far and
away outperformed TIPS, and I expect they will continue to do so for the
foreseeable future.
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