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IS GOLD REALLY DOWN?
This question may seem a little odd as anyone in America can see that in terms of US dollars the price of gold is down. This exercise is intended to examine the question of gold's price in several major world currencies, including the US dollar. We will look at the US dollar in terms of French francs and German marks, and later, Japanese yen and Canadian dollars. The period is that of the past 30 years, from 1971 to the present.
In 1971 the US dollar left the gold standard. US dollars were no longer redeemable in gold, by anyone. The result can be seen in the graphs below (provided courtesy of : Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.) The graphs are index graphs. They illustrate the value of the base currency (the US dollar in the first graph) in comparison with the target currency (the French franc in the first graph.)
In the example graph we see that the US dollar and the French franc begin in 1971 at a reference point of 100. As the value of the US dollar falls it moves below 100 on the graph. A rising US dollar moves higher on the graph.
The US$ lost more than 25% vs. the French franc from 1971 - 1973, gained ground until 1976 - 77 and fell back to the original lows until about 1980. The dollar weakened much more vs. the German mark. By 1980 it had lost about 1/2 its value vs. the mark. Then things turned around. By 1985 the US$ had more than doubled vs. the French franc from its lows of 1980 (and almost doubled vs. the mark.) Yet the US dollar did not reach its pre - 1972 levels.
After early 1985 the Dollar weakened vs. the franc and the mark. By 1995 it had lost all the earlier gains and more. At that time the French franc bought as many US$ as in 1972, 1974 and 1977. (See below.)
The US$ is still down overall vs. its value against the franc in both 1971 and 1985. Conversely, the French franc is up overall vs. the US$ since the US dollar strength of 1985. The US$ has been strengthening vs. the French franc and the German mark since 1995 (having 'bottomed' vs. the mark and the franc in 1995.) The US$ is stronger vs. the franc and the mark than in 1991. Thus the US$ is up vs. the franc and the mark (and gold, see below) since 1991. In fact the US$ is up over 25% vs. gold since 1991 and over 40% since the bottom in early 1996. See the chart below for details
The French franc buys as much gold today as it did in 1991 and in 1996, when gold was priced much higher in US$. Beginning in '97 and continuing through to early '98, gold became 'too strong' against the franc. Since mid to late '99 it has returned to its equilibrium value against the franc.
For the French, gold has not changed much in price (except for volatility) since 1991. The franc could buy less gold in 1992, and more in late 1993 and 1994. From '97 to '99 the franc could buy less gold. Since then it has been strengthening vs. gold. (Or gold has been falling vs. the franc.)
The US$ is up vs. gold (30%) since 1995 and up vs. the franc (33%) and the mark (50%). The franc and the mark are up only a little vs. gold since 1991. In other words, gold is down only slightly vs. the franc and the mark since 1991 (and only about 5% since '95).
Thus it is not gold which is down. I repeat. It is NOT gold which is down, it is the US$ which is up, and vs. the French franc, AND gold about equally, and somewhat more vs. the mark. (The mark fell more perhaps because of the policies followed after reunification.)
Since 1971 the US$ is down about 70% vs. the Japanese yen. And since the gold rally of '96 ended, the yen has strengthened vs. gold too. We also see in the graph below that in mid '95 to early '96 gold became increasingly cheaper in Japanese yen. This anomaly lasted until early '97. Then the price of gold returned to its trend of declining against the Yen. Two historical facts occurred that year. First, the Japanese Prime Minister declared that unless the US dollar stabilized against the Yen the Japanese would consider selling US Treasuries and buying gold. And we saw the beginning of the Asian currency meltdown. We can see in the graph above that the US dollar continued to strengthen throughout '97 and began to fall again against the Yen in mid '98. At this point we had the debacle of the Long Term Capital Management failure. In the graph below we can see that gold fell sharply against the Yen in mid to late '98. This precipitous fall occurred at the height of the Asian currency crisis. Were Yen being borrowed to infuse liquidity into Asian currency markets? Was gold being sold to force it down? Was this tactic too successful? Is this why the bailout was necessary?
In the graph below a rising line means that gold is becoming less expensive in a particular currency. A falling line means that gold is becoming more expensive in that currency. We can see that the gold bull market in '94 - '96 affected the various currencies differently. Since '96 all the currencies have strengthened against gold, except the French franc and the German mark. Compared to the others they are the most stable against gold.
For Canadians the C$ has fallen vs. the US$, and the US$ is stronger vs. gold. As a result the C$ buys as much gold now as in 1991. So the C$ is similar to the French franc and the German mark as all buy an amount of gold today equal to what they would have bought in 1991. This means they hold a similar value vs. gold at present. It is the US$ that has risen vs. gold. GOLD has not fallen.
Interesting, n'est pas?
We shall leave the question of what will happen next to another day.
Robert Bird (a.k.a. TQ)
The observations and opinions above are based upon the charts at the link mentioned.
http://blacktusk.commerce.ubc.ca/cgi-bin/fxplot
© 2000 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada. Permission is granted to reproduce the above image provided that the source and copyright are acknowledged. Time period shown in diagram: 1/Jan/1971 - 20/Jul/2000
July 28, 2000
