Gold Price “Weakness” Explained By The Ongoing Currency War

The bearish sentiment against gold (and silver) is almost unprecedented. The mainstream media is using every piece of news “against” the metals. Take for instance Soros who sold a large part of his GLD ETF holding. The news was blown up as being evidence of the bearishness of Soros vis-à-vis gold. Obviously we did not find any interview or written piece from Soros, proving he expects gold to underperform. As noted by contributor K. Xeroudakis, precious metals strategist, it is a fact that trading the GLD requires an official submission to the SEC. In contrast, Soros can remain entirely anonymous when trading the gold futures in the COMEX or buying physical gold to store it in a vault. The truth of the matter is that nobody knows the real gold holdings of Soros; so concluding that he is bearish without knowing all his positions is simply unacceptable. Read more in our article Gold price takedown: noise vs facts.

Back to the facts. The dollar gold chart does not look very rosy in the short term. For the time being, from a chart point of view (see below), the gold price in dollar terms is in a major support area. Suppose it would not hold, then (much) lower prices can be expected. The positive message that comes out of the price chart is that the every retest of this major support area is taking much longer time (see first of the four charts below).

Jim Rickards points out that the recent dollar strength results in gold price weakness, at least in dollar terms. Given the expansion of the US monetary base, it is difficult to understand why the dollar is getting stronger. During an interview on Kitco, Jim Rickards explains into great detail what exactly is happening.

First, in terms of currency wars, a cyclical pattern is visible today.

The fact that the dollar has strengthened recently means that the Fed will need to print more. Monetary policies are easy to predict; you need to look at the cross rates. If the dollar gets weaker, it means the Fed get what it wants. If the dollar gets stronger, they will ease more. The Fed will eventually get what it wants. Ultimately it will be reflected in a much lower dollar, which means a much higher dollar price for gold. The other thing is that gold is always termed in a currency. It could be flat against the dollar right now, but it is screaming in yen. The price of gold in yen right now is hyperbolic. There is a frenzy in Japan right now (people are handing in their gold and jewels). That is where the currency war and gold converge: gold is always going up somewhere in the world. In currency wars, you have sequential devaluations: right now gold is going up in yen, pretty soon it will go up in sterling, eventually it will go up in dollars as the currency wars move around the world.

Indeed, looking to the gold price in three major currencies, the cycles are crystal clear. Dollar gold reached its peak in September 2011 while euro gold got to its highest point one year later. Yen gold is now flirting with its historic highs. Currency devaluations travel around the world, in cycles, and they are reflected in the gold price of each currency.

gold_price_dollar_2011-2013

gold_price_euro_2011-2013

gold_price_yen_2011-2013

One common misconception is that people mention higher and lower gold price. That is not really correct. Jim Rickards points out that gold is not going up or down, but the value of the underlying currency is moving.

The truth is that gold is constant, it is not going anywhere. What happens is the dollar (or another currency) goes up and down. If they say that gold goes down, what they really mean is the dollar is going up. I think of gold as the “numéraire”, the unit of account, how you measure things. If you would think the Fed would tighten, and you thought the Fed would raise interest rates, it would strengthen the dollar and gold would go down.

The key question remains: how does it come the dollar remains “strong” given the unprecedented expansion in the US monetary base? Jim Rickards explains the phenomenon by looking at the core objectives of the US Fed:

The Fed and the Treasury want a cheaper dollar. There is no doubt about that; it is clear from monetary policy, their actions and speeches. They try to get it through quantitative easing, but they are not getting it. The dollar remains fairly strong because every time there is a panic it goes with a flight to quality. The dollar has been stronger than the Fed would like which means they will try harder (they will print more). What I think will happen is that the dollar maintains its value, so will keep on printing, until very suddenly and unexpectedly, there will be a loss of trust in the dollar (and all paper currencies). It happens not overnight, but it can happen very quickly.

There you have it: imporant answers on the gold price weakness.

Looking at the long term outlook for gold, it is interesting to note that gold is still moving because it is considered a fear trade, or an inflation trade. Very few people think about gold as money. In an earlier interview, Jim Rickards notes that the gold price level should be in a range between $ 4,000 and $ 11,000 an ounce to support the money supply. “When people tell that there is not enough gold to back the money supply, they are wrong in that there is enough gold to support the money supply, but it is a question on which price you have to peg it.” It is very likely that the currency wars will lead to a loss of trust in paper currencies. Such an event will force our leaders to recognize gold’s role as money, a function that is perceived as unconventional in the West (somehow “exotic”, not accepted by the establishment). In the last four decades, money did not have an official role in the monetary system. That could change in the coming years. Meantime,  increased volatility can be expected. Prepare yourself mentally!

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing