I would like to briefly demonstrate for some of the newer members of the Café, in combination of both graphical and written format, the effectiveness of official intervention to cap the price of Gold in Euro denominated terms. When I am through, I believe that they will better understand why gold has too often seemed to run out of steam just as it appeared that it was ready to launch into a new trading level.
There are two charts included in this essay that you will want to refer to. The first is a chart of the Euro currency; the second is Gold in Euro denominated terms.
If you will first observe the Euro currency chart you will see the various annotations I have made. Let's start at the first peak made in early January of this year ( a side note here - I am going to be giving rough prices for gold and not exact prices to keep things simpler and make for a quicker comparison). There we can see that the Euro topped out closing at a price of 1.2818. At the same time, Gold was trading in dollar terms near $430. After a brief setback lasting about a month, the Euro rallied back up as did gold. However, gold was capped by the cartel near the $420 region even though the Euro actually closed slighter higher at 1.2828 exceeding its previous high close. The cartel had managed to knock $10 off the gold price even with the Euro trading at the same level of the prior month. In other words, even though the dollar was falling, gold was not moving up at the same rate of ascent as the previous month.
Fast forward to early April of this year - Gold had managed to rally back up to the $430 region once again. This time however the Euro was trading at 1.2327. What makes this so significant is that the price of Gold was moving higher even as the U. S. Dollar Index was moving up off its lows near 85 and closing in on the 90 region. Gold was actually ignoring the stronger dollar and heading up right along with it. (At this point, please refer to the EuroGold chart in Dark Blue with the price pattern shown in yellow where you can see the gold price rallying sharply in Euro terms during this time frame). As the Euro dropped against the dollar, Gold became more expensive for Europeans to own. The result was that Gold was rising in Euro terms and had reached levels not seen since February 2003. It appeared Gold was headed for an upside breakout on the Euro charts as the two year high at 351.51 was within easy striking distance. This was obviously a "no-no" for the powers that be. If Gold were to smash through the 351 Euro region, European-based hedge funds would be all over the precious metal entering the market with a fury. Enter the gold cartel. They savaged the yellow metal running it into preset fund stop-loss sell orders with the result that it was knocked down some $60 off its peak before it found support above $370 a month later in early May. Sure enough, this occurred at the same time the Euro hit bottom just above the 1.18 level.
Here's where things get dicey however. Over the next two months, the Euro managed to completely recapture the levels it had been trading at in April this year. It is now back near the 1.238 region. Yet Gold, which according to the general consensus is supposed to be trading in lock step with the Dollar, has been held below $410 - fully $20 lower than it had been a mere three months previous. Recall from looking at the Euro currency chart that the last time the Euro was at this level, Gold was trading at $430. What this indicates is that even on days in which the Dollar was trading lower and the Euro higher by consequence, Gold was not allowed to rally. Someone or some entity was sitting on it squashing its attempt to follow the Euro up. It appears the main culprit this time around has been Goldman Sachs according to Bill Murphy's reliable sources. While this may appear to be of no consequence to many gold investors or traders, the implications to Europeans are enormous.
Look at the chart of Gold in Euro denominated terms. Please notice the dashed vertical lines. The first one is drawn through January 2, 2003; the second one is drawn through January 2, 2004. The Euro price of Gold on the former date was 329.942; the price on the latter date at the beginning of this year was 329.433. The price as of today's date is 328.379. In short, the price capping in Gold was been so effective that for the last 1 ½ years, Gold in Euro terms has gained absolutely nothing! Any investor from Europe who bought the precious metal to hold it has made zero return on it for this entire period. As a matter of fact, as of today's date, July 9, 2004, he has actually lost money. Think about that again! As a result of U.S. government intervention through their proxies at Goldman Sachs, J. P. Morgan, etc., European holders of gold have been denied any benefit that would have accrued to them. What is even worse is if we allow for that same investor to have bought Gold as far back as January of 2002 and have held it. It is still trading today at the exact same level! That is more than 2 ½ years of marking time and making zip. Is it any wonder that European investors simply yawn when hearing talk of Gold? At this point, many of them are no doubt looking at a bond with a one year rate of 2% as exciting. Could this be one of the reasons we continue to hear talk out of European Central Banks "threatening" to sell gold and put the proceeds from the sale into interest bearing instruments? Perhaps - whatever their motivation, the fact is that while we Americans have been thrilled with the returns we have made on our gold since 2002, 1/3 of the world's investors are not. That is a significant source of investment demand that has been effectively sidelined for some time now. Tell me that the gold cartel is not well aware of what they are doing. The Gold market needs that kind of extra demand coming out of Europe to push Gold into the type of meteoric rise that many of us who are gold bulls want to see take place.
What we will need to see for them sing a different tune is for gold to once again head back up towards the 351.50 region in Euro terms and smash through it. That is going to take a rate of increase in the price of Gold that exceeds the rate of decrease in the price of the Dollar. Remember, a falling Dollar tends to make gold cheaper for foreign currency holders, not more expensive, since Gold is priced in U.S. Dollar terms on the international market. For example - if the gold price were to hold steady at $408 for the next two weeks while the Dollar fell in value, the same number of Euros would buy MORE ounces of gold. We do not want to see the Euro price of Gold getting cheaper; we want to see it going up! After all, that is the definition of a bull market - rising prices. If the Dollar continues to fall vis-à-vis the Euro, and Gold does not rise at a faster clip than that fall, in Euro terms, Gold is not going to be able to break through its resistance. At some point therefore, Gold is going to have to break away somewhat from following the Dollar's gyrations and begin to trade on its own merit to get the Europeans involved in a larger way. For that matter, the same can be said of many of the Asians as well (The YenGold chart is more bullish than the EuroGold but still has not produced an upside breakout either).
Please do not misconstrue what I am saying - Gold is the "anti-Dollar" and the ultimate store of value. As thus, its fortune will always be tied to the Dollar since that is its main competitor. Nonetheless, a time must come when Gold will have to divorce itself from watching the day to day meanderings of the Dollar and assert its own independent strength. Given the current structural problems inherent in our economy, I believe that day is fast approaching. I am not sure exactly what the trigger mechanism will be, (take your pick- there are any number of them given the current fundamentals), but on that day we should see a sharp acceleration to the upside as Gold takes out the upside resistance in place on the EuroGold chart. Sadly, it will more than likely be the kind of news that is not going to be pleasant to hear as it will portend very tumultuous times ahead.
July 12, 2004
Dan is a professional off-the-floor commodity trader residing in Texas and can be reached at email@example.com with comments.