Gold, Silver & US Dollar Index
Precious metals include but are not limited to: gold, silver, platinum, iridium, rhodium and palladium. Investing in precious metals can be done either by purchasing the physical asset, or by purchasing futures contracts for the particular metal. The chart above is the price of Gold Bullion in $/ounce. A bullion is usually in the form of bars rather than coins.
In this issue ADIC's TECH TALK is analyzing the historical Gold prices. The chart goes back till 1800s. Between 1880 and 1930 gold price was at 19.40 $/ounce. The U.S. Government, which possessed most of the world's gold, moved to cushion the effects of the Great Depression by raising the official price of gold from $20 to $35 per ounce and thereby substantially raising the equilibrium price level in 1933-1934. In history 1901-1932 is known to be the crisis of gold standard.
After the Second World War, a system similar to the Gold Standard was established by the Bretton Woods Agreements. Many countries fixed their exchange rates relative to the U.S. Dollar. The U.S. promised to fix the price of gold at 35$ per ounce. However, because of the financial difficulties during the Vietnam War President Richard Nixon eliminated the fixed gold price in 1971.
The high demand and speculation pushed gold prices from $35 to $850 in 9 years. Gold reached 850 $/ounce in 1980. 1980-2001 period was a corrective period for the precious metals. Gold prices tested $250 levels in 2000. The lower boundary of the long term parallel trend channel held the prices at $250. In 2002, gold broke out of its consolidation range and started rallying. In 2008, gold broke above the historical high level at 850 $/ounce which was seen in 1980. After testing $1030 in 2008, prices pulled back and eventually held above the $850 support. The lower boundary at $600 and the support at $850 will be very important for the long term outlook.
GOLD vs. SILVER
Relative performance is the measure of price trend that indicates how an asset is performing relative to other assets. It is calculated by dividing the price performance of the asset by the price performance of the other asset.
The chart above is the relative performance of Gold prices versus Silver prices between 1982 and 2008. The chart is constructed by dividing Gold cash prices to Silver cash prices for the analyzed period. The chart can be divided into 5 different periods where both Gold & Silver cyclically out/underperformed each other. Period 1 was a clear outperforming period for Gold. In period 2 the relation was opposite of period 1 and this was an outperforming period for Silver. Both period 1 and period 2 were 7-8 years long. In period 3 which was 5 years long, Gold outperformed Silver. Period 4 again reversed the relation towards Silver outperformance and lasted for 5 years. In the beginning of 2008, the relative performance chart reversed. Gold started outperforming Silver. The relative performance chart reached an important technical resistance. If the Gold/Silver breaks above the 80 levels, we will call for a continuation in Gold outperformance.
US DOLLAR INDEX
US Dollar Index is a measure of the U.S. Dollar relative to majority of its most significant trading partners. Currently the index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.
The chart above is the price of the US Dollar Index on a weekly scale. The chart analyzes the time period between 1993 and 2008. In the last 15 years the US Dollar Index had wide swings and formed clear trends. 1995-2001 was a clear up trend. The moving average cross over signal in 1996 was followed by an uptrend. 2001-2008 was a clear down trend. The moving average cross over signal in 2002 was followed by a down trend. Both trending periods were confirmed by trend line breakdowns and breakouts. US Dollar Index's sharp rally in the last quarter of 2008 generated important technical signals. In the following months we will test the validity of these technical signals. The first positive signal was a trend line breakout at 77 levels. The second bullish signal for the Dollar was the moving average crossover. The Dollar index rallied from 70 levels to 88 levels in three months. In December, the Dollar index pulled back sharply to test the moving averages and reached the 61.8% Fibonacci retracement at 77 levels. Short/intermediate term positive outlook remains intact for the Dollar index. The validity of the technical signals and the further strength of the Dollar will depend on its stability above 80 levels.
Assistant Vice President/Portfolio Management
Abu Dhabi Investment Company
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