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Gold Still "Ultimate Insurance"

September 29, 2004

Summary and Conclusions

  • That gold is still the world's "anchor" currency is validated by the following analysis.
  • One surprising discovery flowing from this analysis was that the Japanese Household Savings Rate has been tanking over the past few years. This may be why the Japanese Yen has not been as strong as the Euro, and may also be why the Yen Price of Gold appears so strong on the short term chart.
  • A weak Yen has some important (possibly positive) implications for the global economy
  • There is, as yet, no technical indication that the price of gold in any currency is about to "explode" upwards, but a $500 - $550 target looks possible.

Chart sources:

It appears that the Yen price of gold has tentatively broken up to a new high out of an ascending Right Angled Triangle

Not so exciting on the monthly chart below, but apparently confirming a bottoming out

It is also looking strong vs the US Dollar Index but yet to break out of equilateral (continuation?) triangle. Note the long saucer formation, the break out and the subsequent "handle" formation. Classic stuff.

Monthly chart below shows strong resistance at current level. Breakout could take it $500. Failure could see reaction to $350

Objectively, except for 1998 - 2001, the Dollar Price of Gold has been travelling sideways relative to the US Dollar for 20 years, and there is no technical reason to believe that $500 - $550 will be penetrated on the upside

But it has broken up out of what might be described as a fan formation relative to the A$ (also bullish, but less so than relative to the Yen)

Nevertheless, monthly chart has been stronger than US$ price of Gold, but with similar strong (24 year) resistance at A$600

A bit iffy relative to the Euro

Similarly iffy - but still bullish - relative to the G5 Basket

Consolidating relative to the Euro/DM chart on a monthly basis, with the possibility of a break up

The answer to what all of the above means may lie in the Japanese Yen.

Savings rate in Japan has fallen to around 5% from around 14%

Source: www.oecd.org/dataoecd/53/48/32023442.pdf

Note how savings rates in Europe have been rising modestly since the equity markets peaked, and also how US Savings rate seems to have bottomed.

There is an inverse relationship between savings rate and multiplier effect. If savings rate in US is rising, multiplier will fall - which is probably one reason why M3 growth rate is falling. This will ultimately have a negative "capping" impact on US GDP. Conversely, a falling savings rate in Japan will have a positive "driving" impact on Japanese multiplier and GDP. The divergence in savings rates might be why Japanese Yen is softer than Euro.

Here's a hypothetical situation arising from all of the above:

  • Rising savings rate in the US will cause the GDP to flatten out (and Equity Markets to resume bear trend) and, paradoxically, may cause the dollar to strengthen as Balance of Payments deficit shrinks. This might allow Fed to raise interest rates to continue bringing capital into the country. It might also explain Greenspan's otherwise strange decision to raise rates.
  • Falling savings rate in Japan will shift burden of consumption to Japan, causing its domestic economy to grow but its currency to fall relative to Euro and Dollar (which will protect its exports to Asia and Europe)
  • Rising savings rate in Europe will keep the Euro strong and the Euro economy softish
  • Epicentre of world economic growth shifts to Asia, but with capital accumulating in Europe because of relatively high savings rates

Problem is the short term Dollar chart is looking VERY vulnerable based on oscillators.

Which raises a question: How close are we to an accident?

Conclusion

There's many a slip twixt cup and lip. Whilst I can see a hypothetical pathway through the jungle, Gold remains the ultimate "Insurance Policy"


24 karat gold is pure elemental gold.
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