Print 
PDF
BookmarkIn his latest TV appearance, Jim Rickards (author of the best seller Currency Wars) talks on Bloomberg about how currency wars and gold dynamics are coming together.
Gold is 25% up in the last 3 months, but it’s up in Yen, not dollars. This is where currency wars and gold dynamics come together. When you think about cross rates it’s a zero sum game. Not every currency can go down against every other currency at once. Gold is always rallying somewhere; right now it is rallying in Yen. It you want to be fancy, you are short Yen and buy gold. When the Yen gets to 110 then, you want to short sterling and buy gold. At the end of the day you will come back to gold in dollars. Gold is not going to do much in [US] dollars this year. I look for a dollar move late this year or in 2014. Meantime you can always make money in gold, as “it is always 5 o’clock somewhere.”
By pulling some charts together, we were able to visualize what Jim Rickards tried to explain. The next charts show gold in four major currencies. Apart from the gold price, each chart shows the exchange rate of each currency in the other currencies. The time period is the last 2 years. Mind that the exchange rates are inverted: the higher the line on the chart, the weaker the currency in question.
What you clearly see, is that gold is always rallying somewhere as soon as it is being devalued significantly against the other currencies. Given the fact that currencies devalue against each other, and that the currency destruction has become an important catalyst for gold, there cannot be a gold rally in all currencies simultaneously.
Yen gold since April 2011
Mind how the Yen index (XJY) went from 113 points in July 2010 to 102 points today. It does not reflect the increase in yen gold over the same period of time.
Sterling gold since April 2011
Mind how the British Pound index (XBP) went from 159 points in July 2010 to 153 points today. It does not reflect the increase in sterling gold over the same period of time.
Euro gold since April 2011
Mind how the Euro index (XEU) went from 126 points in July 2010 to 128 points today. It does not reflect the increase in euro gold over the same period of time.
Dollar gold since April 2011
Mind how the US Dollar index went from 83 points in July 2010 to 83 points today.
Gold IS the price of money
Looking at these data, it is fair to say that the currency indexes are not a reliable indicator for the currency strength. They are only reflecting the relative strength, i.e. against other currencies. After all, they are made up of a basket of several exchange rates, each with a given weight. By contrast, the gold price is the best and most objective indicator of the price of a currency. Gold IS the price of the currency.
One should note also that it is fair to expect some patience before dollar gold could goes up. A decrease in dollar gold could be in the cards as well, at least short to mid long term. As the epicenter of the currency war is moving across the world, it makes sense that Jim Rickards expects dollar gold to go up as from 2014.
How will this end? In one word: badly! In Jim Rickards his words:
The wrong policies were used to solve the financial problem of the 2008 crisis. Now we are heading for another crisis: an international monetary crisis. The international monetary system has collapsed three times in the past 100 years: in 1914, in 1939, in 1971. Such a collapse is a loss of trust in the dollar as the world reserve currency. The signs are there that the crisis is underway: China (according to unofficial sources) has some 3,000 tonnes while Russia has doubled its reserves in the last 4 years. Germany is taking its gold back.
