Wednesday, August 5, 2009

Gold v. Currencies

Figure 1 is a concept that I have put forward before, and it is gold's performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. This is a weekly chart. Relative to other currencies, gold is starting to outperform, and the indicator has turned positive after about 10 months of underperformance.

Figure 1. Gold v. Currencies

Two other factors in gold's favor that have been discussed in this blog over the past 4 months are: 1) the Dollar has a high likelihood of unraveling (and it is!); 2) gold is on a launching pad that should result in a strong secular move.


Anonymous said...

If the Dollar unravels, then it would push Equities higher... but you expect equities to decline.

Personally, I think the dollar will unravel, as a fiat currency it has no choice, but I think that will happen around 2012, until then you can still have pullback as people seek safety from a re-collapse in equities as deflation continues through the current develeraging process.

Your thoughts?

Guy M. Lerner said...


It might be just a time frame thing...for example in the article/ research that I highlight concerning the risk the Dollar is under, the strategy lasts about 65 weeks for winning trades and 17 weeks for losing trades; in other words, if the dollar is going to unravel it is likely going to be a long affair.

As far as equities, everyone assumes equities to move higher when the Dollar declines; this would be like 2002 to 2007; commodity based equities should outperform; Treasuries will be under pressure (i.e., higher yields); the combination of these will be headwinds for equities (like 2002 to 2007).

While I am expecting a decline, it is likely that such a decline will be bought; how deep of a decline is yet to be determined, but I would like to sentiment turn bearish (i.e., bull signal). We usually get about 2.5 buying opportunities per every 12 months when you consider extremes in investor sentiment.

Lastly, I wonder how equities should perform if and when gold breaks out (it is not a done deal).

Lots to work on upon my return!!

Anonymous said...

Paul Tudor Jones:

"Slowing growth in China and the return of front-page stories on swine flu may be “further catalysts for global equity markets to pause in September,” the Greenwich, Connecticut-based firm said in an Aug. 3 client letter, a copy of which was obtained by Bloomberg News.

Tudor said the 47 percent gain in the Standard & Poor’s 500 Index of the largest U.S. companies since March 9, when it fell to a 12-year low, is a “bear-market rally.” The index topped 1,000 for the first time in nine months this week after companies reported better-than-expected profits.

“Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets,” Tudor said. “We are not inclined to aggressively chase the market here. Many doubts remain about the sustainability of this recovery, most prominently the weakness of household income growth.”

Tudor said it expects the U.S. dollar to fall by the end of the year as money managers diversify their currency reserves. The dollar advanced 0.4 percent to $1.4341 per euro after touching $1.4447 yesterday, the weakest level since Dec. 18.

“Reserve accumulation and diversification trends will be persistent and mutually reinforcing the direction of the U.S. dollar,” Tudor said.

How can we interpret this? If this decline continues toward year end, instead of being drawn out, can a falling dollar raise Oil/energy enough that it will be seen as an impediment for growth and cause a decline in equities, ie circa 2008?