Gold Price Movements are Relative to Currencies
Simple but True
It may sound glaringly obvious that movements in the price of gold or any other commodity are relative to the currency they are quoted in, but it is surprising how many people don’t realise it. We frequently get people phoning us to buy or sell gold, and telling us that gold has gone down (if they are buyers), or up (if they are sellers. Sometimes they are right, often they are wrong, although it could be argued that they are both right and wrong at the same time! How can this be? Please read on, there is a simple explanation for this conundrum.
Gold Prices Can Go Up & Down at the Same Time!
Yes it’s strange but true, and it happens most of the time. The key to unravelling this apparent contradiction is to realise that people often measure gold in different currencies. If your yardstick shrinks or grows, it will give you wrong measurements, and if different people use different yardsticks, they are almost certsin to arrive at different answers.
An Example
Let’s assume that gold enjoys a quiet and stable day. Let’s also assume that the value of the dollar goes down against the pound. In this case the price of gold will appear to have risen when measured in dollars, but to have fallen when measured in pounds. It may have stayed the same when measured in euros, or have gone in either direction depending on the price movement of the euro against the other currencies.
If the dollar were to rise against the pound, then this would have the opposite apparent effect on the price of gold, i.e. gold would appear to to down against the dollar and up against the pound.
Which Direction?
When you think about the above example, you may realise that all price movements are relative to the commodity or currency with which they or being compared or against which they are being measured. Nothing is absolute. Of course, if gold has just gone up against all major currencies, it is tempting to believe that gold has in fact gone up in price, but it is also possible that all the currencies have actually gone down. Isaac Newton and Albert Einstein would have understood this completely, but you do not need to be a genius to also understand it.
There is another question which an enquiring mind would raise. Is it correct to measure gold against the dollar (or pound, or euro), or should we be measuring the dollar against gold. What are we trying to measure, and what is our ruler or standard?
Relative Motion – Trains in a Station
We must all at some time have been on a train in a station, when the train at the next platform has pulled away, leaving us with the false impression that we were moving and that the other train remained stationary. This is an example that all motion is relative, it’s just that we humans generally judge our motion relative to the earth, sometimes we find ourselves judging it relative to something different such as the train at the other platform. It’s the same when we try to work out whether it is gold or a currency which has moved.
Just to take the example further, let’s assume we are sitting on a stationary train, when both the trains on adjacent platforms start to move at the same time. If they both moved in the same direction, we would be convinced that it was we who were moving, but we would be experiencing an illusion. However if the trains moved off in opposite directions, we may become even more confused about which of the three were moving, and in which direction. If we looked left, we would think we were moving in one direction, while if we looked right, we would think we were moving in the opposite direction.
Pounds Sterling or Dollars?
Because we are based in the UK, and most of our customers are also UK based, we tend to quote all our gold prices in British pounds. Because of relative movements between currencies as discussed above, particularly over medium or long periods of time, we often get enquiries from people about why our prices are higher (lower) now than they were previously when gold has moved down (up). The answer almost always lies in the fact that the enquirer has been looking at gold in dollars per ounce, and we are quoting in pounds per ounce. It can become quite frustrating trying to explain this to some people, sometimes I have heard members of our staff repeatedly trying to explain to British customers that we quote prices in British pounds not US dollars. Incredibly some (British) customers want us to convert our quoted price into US dollars!
For American customers, we are quite happy to convert our prices into dollars, and for our Eurozone customers, we are also quite happy to convert into euros. We operate bank accounts in all three currencies, but our main account is in sterling. Because of extra administrative costs, banking costs, and foreign exchange costs, our non-sterling prices will be less favourable than our sterling ones.
Up, Down, And the Same
If you consider that the London Gold Fixing is also done in euros as well as dollars and pounds, then it is possible to see gold go up, down, and stay the same, all at the same time. In fact onThurdsay 20th March 2003, comparing the morning and afternoon fixes, gold went up 30 ¢ from $335.50 to $335.80, down 4.5 eurocents from €313.963 to €315.720, and stayed exactly the same in pounds sterling at £214.377!
Gold prices eclipsing currencies
A morning call from ForexYard says:
“There is a very strong bullish channel forming on the daily chart, and gold is currently floating in the middle of it. In addition, both the MACD and the RSI on the chart are providing bullish indications, suggesting that the upward movement may have more steam in it.”
The suggestion from the forex trading firm is that, “this might be a great opportunity for forex traders to join a very popular trend.”
Friday saw precious metals trade into positive territory.
Both gold and silver prices rallied sharply in the early afternoon and are currently trading near their daily highs. Silver made a fresh nominal 31-year high yesterday above $35.30 while gold is close to the all-time nominal high of $1,440 that it made earlier this week.
David Morrison at GFT comments:
“The recent price surge of both metals has been quite stunning, and eclipses any currency move that we have seen recently. This supports the thesis that precious metals are increasingly viewed as the world’s only true safe haven and store of value, even though they pay no interest.
“Of course, in an environment where the world’s reserve currency is actively debased through the Fed’s programme of debt monetisation, and the major trading currencies (US dollar, euro, yen and British pound) attract negative interest once a realistic measure of inflation is taken into account, it makes perfect sense for investors to hold significant amounts of precious metals.”
What Do These Major Currencies Tell Us About Gold, The Dollar? 
You know how well gold performed as priced in dollars over the past ten years, or rather, how poorly the dollar performed against gold during that period.
In 2001, you could buy an ounce of gold for $250. Today, gold sells for more than $1,400 an ounce. That’s more than 460% gain.
Again, you know this information. You might even be getting sick of hearing it repeated by gold vendors, gold bugs, or talking heads on TV who mention it with the rapt excitement of someone reporting actual news.
So, in an effort to illuminate a different aspect of the gold story that you probably haven’t seen anything about, I’m going to focus on other currencies.
Because I’d be surprised if you’ve heard anything about gold’s price as expressed in a different currency.
Take a look at the chart below, which shows the percentage gains of gold priced in dollars and six other major currencies.
It’s kind of difficult to make out, but there’s a huge disparity between the US dollar’s loss of gold-purchasing power (more than 450%), and the Swiss Franc’s loss of gold purchasing power (less than 200%).
The question is: why did the Swiss Franc lose half as much purchasing power as the US dollar?
Or perhaps even more interestingly, how is it possible that the dollar lost 1.5 times more purchasing power than the euro? The weak-sister, debt-plagued, hodge-podge euro is stronger than the dollar after the past ten years?
I could come to a variety of confusing conclusions after looking at the chart above. I’m sure there are dozens of economists who would pounce down my throat after making any one of them.
But I think a dollar crisis is the only logical conclusion we can come to. Regardless of how we got here, whose fault it is, who pushed the printing press lever, or who spent beyond whose means – the point is: we’re here. Crisis isn’t just on its way. It’s here. The dollar is in crisis.
It’s lost a significant portion of its value not just against gold, but against other world currencies, much more value in some cases.
It would be one thing if all paper money devalued at more or less equal rates. No currency would become an obvious winner or loser, and there would be no reason or incentive to dump one for another.
But when one currency devalues so much more than others, by orders of magnitude, then you should start worrying if you’re the holder of that currency.
Let me back off for a second.
I’m sure you’re familiar with the joke about the two campers who see a bear coming. One camper begins lacing up his running shoes, and the second camper says, “You can’t outrun the bear, even with running shoes on.”
And the first camper replies, “I don’t have to outrun the bear, I just have to outrun you.”
Well right now, I own gold, but not because I’m certain that we’re imminently headed towards an inevitable gold standard that will make me rich when gold is revalued to account for the dollars out there.
Gold is the bear. These other currencies don’t have to be better than gold in order to gain the same kind of cache the US dollar has enjoyed over the past 50 years.
They just have to be better than the dollar.
And if the dollar gets caught by the renminbi, or the yen or even the euro, then it won’t matter whether it was gold that dethroned the dollar. It will just matter that the dollar has been dethroned.
Our hegemony hangs by a paper string. Our ability to procure oil, copper, coffee, gold, silver and all those other wonderful things that we don’t produce, but need to buy – it hinges heavily on the dollar’s status as reserve currency.
It only takes one country or exchange to start settling contracts in another currency, and the dollar is in big trouble.
Resources:-
