01 November 2009
When gold reached its record high against the US dollar of $1064.20 on October 13th, the price of gold in euros, Swiss francs and British pounds did not confirm. On that day they were still below their recent high by 10.1%, 7.5% and 4.4% respectively.
Technically, this result was a bearish divergence, which can be a warning sign that the market's internal condition is deteriorating. For example, bearish divergences often signal a top.
Whether or not gold was signaling a potential top, the argument could be made - and many have made it - that gold was rising solely because of dollar weakness, rather than underlying fundamental strength. It is an argument that on the surface seems plausible, but it is one that is not supported by an obvious fact. Namely, gold has been rising against all of the world's major currencies this decade, and for the past eight years has appreciated by double-digit rates of return against all of them. However, gold's progress at any moment in time is very much dependent on relative currency movements.
For example, in 2008 gold dropped -14.9% in terms of the Japanese yen while at the same time it appreciated 44.3% against the British pound. But from 2001 through 2008, gold's performance against these two currencies is similar, rising 13.6% p.a. on average against the yen and 17.1% p.a. against the pound.
What's more, last year's results are to a certain extent being corrected this year. Through October, gold is up by 16.7% against the yen and only 4.8% against the pound, which makes my point. We live in a world of floating currencies that bob up-and-down relative to each other, but they are all sinking against gold, as evidenced by gold's double-digit rates of appreciation this decade against all of them, as shown in the following table (which also presents separately, gold's results this year for the ten months through October 31st).
Interestingly, the results for silver are similar. Silver had a relatively bad year in 2008 against most currencies because it was sold aggressively in the deleveraging that occurred after the collapse of Lehman Brothers. But look in the table below at the remarkable results that silver has achieved so far this year.
So the point of this analysis is to forget about the bearish divergences and other noise that can easily distract one from the big picture, which is clear from the above tables. It does not really matter whether gold is up or down one week or one month in terms of one currency or another. Let the professional currency traders and speculators worry about those fluctuations. Focus instead on the big picture and take a long view.
In the long run, all currencies are losing purchasing power against gold, which is the important point. Don't get caught up in the daily, weekly or even monthly price changes in the precious metals that occur as a result of the volatility of fiat currencies.
We therefore need to ignore the noise that can easily distract us from the big picture. And one way to do that is to continue following the strategy I have been recommending all decade. Save gold, and/or save silver. Accumulate precious metal month-in and month-out under a cost averaging program, and view the gold and silver accumulated in this way to be your savings account. Savings are always a good thing, particularly so when you are saving sound money.
