GOLD IS THE WORLD'S STRONGEST CURRENCY -- GOLD HAS HIT A SIX-YEAR HIGH QUOTED IN DOLLARS -- AND IS HITTING MULTI-YEAR HIGHS WHEN QUOTED IN MAJOR FOREIGN CURRENCIES AS WELL
GOLD IS DOING BETTER THAN THE WORLD'S MAJOR CURRENCIES... Gold is more than just a commodity. Gold is sometimes also viewed as an alternate currency. When global traders lose confidence in their currency, they often turn to gold as an alternative store of value. Since gold is quoted in dollars, it rises in value when the dollar weakens. That's one way for investors to preserve their wealth when the Fed starts to lower rates and weaken its currency. Gold recently rose to a six-year high on falling U.S. interest rates which have weakened the dollar (aided by a more dovish Fed). So gold is rising in dollar terms. The true hallmark of a bull market in gold, however, is its ability to rise relative to other major currencies. And it's doing just that.
Chart 1 compares this year's performance in gold (red bar to the left) relative to the world's major currencies. That includes (in order of relative strength) the Canadian Dollar, Japanese yen, U.S. Dollar, Swiss franc, Aussie Dollar, British pound, and the Euro. And it shows gold doing better than all of them. Chart 2 is even more graphic by showing those same currencies relative to the price of gold which is plotted as the zero line. Clearly, all of them are losing value relative to gold.
With global growth slowing, central bankers around the world have taken a more dovish turn toward monetary stimulus which usually weakens their local currencies. The Fed is the most recent central bank (and the biggest) to telegraph lower interest rates and a weaker dollar. That may be one of the main reasons that global traders have turned to gold as a new store of value. Since gold is a non-interest bearing asset, it also does better when global rates are dropping.
GOLD IS RISING IN FOREIGN CURRENCY TERMS AS WELL...Previous articles have shown the price of gold rising to a six-year high when quoted in U.S. dollars. The fact is that gold is also trading at multi-year highs when quoted in major foreign currencies. Let's start with this year's two strongest currencies. The weekly bars in Chart 3 shows the price of gold quoted in Canadian Dollars rising to the highest level in at least three years. Chart 4 shows gold quoted in Japanese yen in a clear uptrend as well. Although not shown here, it's doing the same when quoted in Swiss francs, the Aussie Dollar, and the British Pound. The euro is this year's weakest currency. Chart 5 shows the price gold quoted in euros doing even better than the first two charts. That's because the chart of gold always looks stronger when quoted in a weaker currency.
The main message is that gold has become the world's strongest currency. That may be the price to pay for global central bankers in a race to even lower (or more negative) rates. That, in turn, weakens their currencies in an attempt to boost exports and inflation, and prevent recession. [Which begs the question of what they're going to be able to do when a recession finally hits]. Gold's strength may be a sign that global traders are losing confidence in their central bankers and their currencies. Which may be causing some nostalgia for the gold standard which (although too rigid) exerted some discipline on central bankers.
[For more on that last point, I refer you to today's WSJ article by James Grant entitled "The Fed Could Use a Golden Rule", p. A17].
