Precious metals are considered to be rare and/or have a high economic value. Higher relative values of these metals are driven by various factors including their rarity, uses in industrial processes and use as an investment commodity. Precious metals include, but are not limited to: gold, silver, platinum, iridium, rhodium and palladium. Silver other than its precious metal status is an industrial metal and more vulnerable to economic cycles. Gold on the other hand is regarded as a safe haven metal which is demanded more during economic and political instability periods.
The chart above analyzes the relative performance between Gold and Silver for the past 2 centuries. The relative performance ratio is derived by dividing the Gold cash price to silver cash price between 1800 and 2009. 1870-1902 was an outperforming period for Gold. Between 1902 and 1919, the relative performance favored Silver. 1919-1941 and 1967-1990 were also outperforming periods for Gold. 1750-1870 period is known as "The crisis of silver currency" during which Western Europe and United States suffered a massive shortage of silver coinage. This forced the governments and the public to demand more gold. 1901-1932 is known as "The crisis of the gold standard." During this period demand increased for Gold. Price declines in goods and depressionary effects pushed governments to abandon the gold standard. U.S. raised the official price of gold from $20 to $35. 1946-1971 period is known as the "Post-war international gold standard." After the World War II many countries fixed their exchange rates relative to U.S. dollar. This was followed by an inflationary period and the gold price surged from $35 to $850 in less than a decade. Since 1990, Silver has been outperforming Gold. However, unlike the previous Gold/Silver out-performance-underperformance cycles, 1990 -2009 was not clearly dominated by any of the metals. 1941 and 1990 were two peak levels on the Gold/Silver ratio. In 1941, Gold was at $35.5 and Silver was at $0.35. Gold/Silver ratio equaled 101. In 1990, Gold was at $423 and Silver was at $4.06. Gold/Silver ratio equaled 104. 1941 and 1990 are separated by 49 years. 1870, 1919 and 1967 were the troughs on the Gold/Silver ratio. In 1870, Gold was at $22.89 and Silver was at $1.43 with a Gold/Silver ratio of 16. In 1919, Gold was at $20.67 and Silver was at $1.33 with a Gold/Silver ratio of 15.54. In 1967, Gold was at $35.5 and Silver was at $2.06 with a Gold/Silver ratio of 17.2. The troughs, similar to the peaks were separated by almost 49 years. We are now close to the peak levels of 1941 and 1990. If the ratio breaks above the 100 levels, the following years might experience a massive out-performance by Gold. If the ratio breaks below the 1997-2006 low levels at 50, Silver might continue to outperform Gold. Time analysis forecasts a peak in 2039 and a trough in 2016.
GOLD & DJIA
TECH TALK analyzed Gold & Dow Jones Industrial Average in the previous issues. The reports also analyzed Gold vs. Dow Jones Industrial Average and Gold vs. Silver relative performances. The reports focused on the long term relations between the asset classes and their price performances. While analyzing most of the investment themes, the studies tried to use basic technical analysis tools to help investors and readers benefit from the reports.
The two charts above are another update on Gold & Dow Jones Industrial Average. The study uses basic trend lines and moving average to analyze the current trends in both asset classes. Most of the investment and trading books advice one to be invested in the direction of the long term trends. However, people usually go with the flow of the daily movements and forget about the long term cycles. They get distracted by the daily news and short term volatility. The only way to overcome this is to look at the intermediate/long term charts and analyze the long term patterns. Gold and Dow Jones Industrial Average are two good examples where we can see the long and short term cycles being dominant in the two asset classes. Gold is in a long term uptrend. It is way above its 1999 low levels and it is also 50% higher than its October 2007 levels. However, Dow Jones Industrial is below its 1999 high levels and also 30% lower than its October 2007 levels. Gold broke above its 2008 high levels in October 2009 while Dow Jones Industrial Average is still below the historical high level of 14,000s.
In the last one year both Gold and Dow Jones Industrial Average moved higher. While Gold cleared most of the resistances and is now reaching new historical highs, Dow Jones Industrial Average could only retrace 50% of the 2008 melt down. In the last few months the momentum indicator generated negative divergences, in other words loss of momentum on the Dow Jones Industrial Average. RSI which is also plotted on the Gold chart isn't showing any sign of weakness. Even though equities and precious metals are in sync in the short/intermediate term, in the intermediate/ long term we are likely to see the decoupling between the two asset classes because of the dominant long term cycles.
10 YEAR U.S. TREASURY NOTE & YIELDS
Nov. 17 (Bloomberg) - Federal Reserve Chairman Ben S. Bernanke's diagnosis of a weak U.S. Economy and labor market signaled that the central bank's extended period of low borrowing costs may get even longer. Bernanke said "significant economic challenges remain," with lending constrained and the jobless rate above 10 percent.
The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend. The loss of upside momentum on each successive high gives the pattern its bearish bias. The final break of support indicates that the forces of supply have finally won out and lower prices are likely.
The two charts above analyze the 10 year U.S. Treasury Note's price and the 10 year U.S. Treasury yields. The chart on the right is plotted on a longer term scale to display a clear example of a rising (bearish) wedge between 2003 and 2007. The chart on the right is also used to show the timeline of the FED rate actions in the last 10 years. The chart on the left analyzes the current market action on the 10 year U.S. Treasury Note. Since the beginning of 2009, the price of the 10 year treasuries declined from 128.4 levels to 112 levels in June. Between June 2009 and November 2009 the price climbed upwards and reached 120 levels. The counter trend action in the second half of 2009 formed a rising (bearish) wedge similar to the one that was formed between 2003 and 2007 on the yields.
The history suggests that FED has always reacted to the market movements and the actions of FED were delayed when compared with the market activity. After the peak on the yields in 2000, FED could only start cutting the rates in 2001. After the bottom in 2003, FED started increasing the rates in 2004. Right after the peak in 2007, the yields broke down the bearish wedge pattern and the yields started falling down sharply. FED reacted to the market action and started cutting the rates in August 2008. If the history is repeating itself and the rising (bearish) wedge on the treasury note breaks down in the following months, we will see the FED stepping in and taking the required actions. Until we see the breakdown of the wedge pattern U.S. treasury markets will be stable. If the support at 118-118.50 breaks down, we will expect sharp declines on treasuries.
GOLD vs. AUD, CAD & EURO
A commodity currency is a name given to currencies of countries which depend heavily on the export of certain raw materials for income. These countries are typically developing countries, eg. countries like Burundi, Tanzania, Papua New Guinea; but also include developed countries like Australia and Iceland. In the foreign exchange market, commodity currencies generally refer to the Australian Dollar, Canadian Dollar, New Zealand Dollar and the South African Rand.
The charts above analyze Gold's (hard money) relative performance versus major currencies (paper money) for the past three decades. A strong currency is a globally traded currency that can serve as a reliable and stable store of value. Political stability, low inflation, consistent monetary and fiscal policies, backed by reserves of precious metals are some of the factors that contribute to the strength of the currency. If we analyze the charts above, we can see that during 1980s and 1990s the EURO, CAD and AUD fluctuated against GOLD. The wide ranging activities were bounded by trend channels and were comparatively quiet periods. By mid-2000s there has been a structural change in the way paper money was evaluated against Gold. Even though the change started in the beginning of 2000, the out-performance of Gold versus other currencies didn't accelerate until October 2005. Gold/Canadian Dollar, Gold/Australian Dollar and Gold/Euro broke out of their long term consolidations and started rallying higher. The sharp movements on the upside showed that people started favoring Gold and precious metals as a reliable and stable store of value. The imbalances between the exports and imports for most of the countries forced them to depreciate and devalue their currencies. This was important to reduce their trade deficit in the long run. The race between the governments to depreciate their currencies or not take action to strengthen them caused conflicts and political instability between trading countries. A Nov. 19 article on Bloomberg News said: European Union finance chiefs will urge Chinese Prime Minister to allow the yuan to appreciate against the U.S. dollar at a meeting next week. U.S. also called on the Chinese leadership to make good on commitment to allow the yuan to appreciate to help prevent trade imbalances that exacerbated the global economic crisis. In the last decade Gold and other precious metals were stable against the paper currencies and appreciated in value. Even when compared with stronger commodity currencies we can see that Gold consistently outperformed the AUD and the CAD. In the last few months, GOLD/CAD reached a new high. GOLD/EUR is testing the historical high and GOLD/AUD started moving higher. Gold continues to outperform most of the paper assets and currencies.
Aksel Kibar, CMT
Portfolio Manager
Abu Dhabi Investment Company PJSC
www.investad.ae/en/Home.aspx
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