“…Take a look at this chart of gold prices measured in the top 10 most important world currencies…”

So the spot gold price sank in October, dropping right back to 13-month lows at $683 an ounce.

After failing to breach $930, this collapse marked the third step lower from March’s all-time high of $1,032. And from a technical perspective, the Gold Chart looks horrible — recording lower lows and lower highs for the last six months and more.

Right? Well, fact is, the action has actually been greatly muted if we allow for the shocking volatility in gold’s No.1 competitor for “safe haven” funds, the almighty U.S. Dollar.

You see, like so much else, the market action just described only sets Gold in terms of the greenback (against which it has still tripled since July 1999).

Versus pretty much every other world currency, in contrast, gold in fact enjoyed a banner month this October — delivering gut-wrenching volatility plus new record highs — starting right here in London, home to the world’s $60 billion-a-day trade in wholesale Gold Bullion Bars (a.k.a. the “spot market”).

Mid-month, gold also leapt to new record highs for Australian, Canadian, Danish, Estonian, Hong Kong, Hungarian, Icelandic, New Zealand, Norwegian, South African, South Korean, Swedish, Turkish and Russian investors.

Oh, and the 350 million souls in the Eurozone. Plus the 1.1 billion people of India.

Gold Prices have of course slipped back — and sharply — against all major currencies since reaching €685 an ounce for European investors and savers on Oct. 10th. (That marked a near-tripling from the low of Jan. 2000.) In the spot market, gold’s now trading almost 13% lower as the month-end draws near.

And notable by its absence from the rogues’ gallery of fast-sinking currency zones listed above is the Chinese Yuan, as well. More spectacularly, the world-destroying Japanese Yen has squashed the price of gold since turning sharply higher against everything — real estate, global equities, emerging-market debt, even the Tokyo Nikkei — in mid-July.

But if we really are witnessing a global currency crisis led by the destructive reversal of the Yen Carry Trade (and it certainly looks like it from inside a wallet of Sterling or New Zealand Dollars, let alone Forints or Krona), then just what kind of fight is gold putting up as the apparent “ultimate” safe-guard against currency shocks?

Regular visitors to BullionVault may recall a chart we offered in August this year, a chart showing the Gold Price in terms of the world’s top 10 currencies by economic output. It’s not perfect; the GDP weightings for 2008 will need revising, perhaps, when this year’s full-year data becomes available early next year.

But as a measure of truly globalized gold prices, it both softens the U.S. Dollar’s long slide of 2002-2008 on the currency markets, as well as tempering this month’s intemperate highs in gold bullion vs. the Aussie, Loonie, HK Dollar, Forint, Kiwi, Krone, Rand, Won, Lira, Ruble, Euro, Pound Sterling, Rupee and various Kronas.

You can’t help but spot the volatility — otherwise known as “My gold just crapped out!”

The way “quant jocks” figure the violence in asset prices, in fact, the daily volatility in this global gold price has more than doubled since August to a three-decade record.

You might also note, however, that gold really has risen sharply against all major world currencies so far this decade, not just the U.S. Dollar. And no one should imagine it will be an easy ride — whether up or down — from here.

There’s too much at stake when you try to measure that $60 billion daily turnover in physical gold against the $3.2 trillion daily turnover in official government currencies.

Regards,
Adrian Ash

November 03, 2008

Greg’s Endnote: What Adrian doesn’t know about storing gold offshore isn’t worth knowing.

And just a quick reminder to all Whiskey Shooters: Our discount offer for your “Personal Bailout Plan” ends tomorrow when we will have a new President-elect…but the same old growing deficits. Those deficits are going to be more economic trouble than anything we’ve ever seen; don’t be caught unprepared.

Gold Versus the World’s Top 10 Currencies was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Just how busy will the IMF get when it helps host the G-7 meeting of policy wonks from the world’s seven richest nations in Washington this weekend?

Rumors were that finance ministers from Europe, Japan, the U.K., Canada, and, of course, the United States wanted to chew over joint intervention in the currency market — buying dollars to support the U.S. currency, easing the surge in commodity prices, and helping export-dependent economies avoid a race to debase as they try to stay competitive.

But could they really be so dumb?

On Monday, the IMF’s managing director, Dominique Strauss-Kahn, called for concerted crossborder intervention and regulation by national governments to stem the ongoing global banking crisis.

On Tuesday, the IMF laid out plans to reorganize its own finances, selling 400 tonnes of gold reserves to help cover a $400 million deficit in its $1 billion budget.

Tuesday night saw the IMF warn that total write-downs (i.e., balance sheet losses) due to the collapse of subprime U.S. mortgage lending may reach $945 billion.

“It is now widely acknowledged that public measures are needed in a number of areas,” claimed the IMF — established at the end of World War II to help keep the world’s financial system in check with the U.S. dollar newly crowned as king of world currencies.

“In particular,” the IMF added, “there may be a need to shore up the prices of various types of securities to prevent fire sales.”

And then, on Wednesday, the IMF cut its forecast for world economic growth in 2008 to 3.7 percent, from the 4.2 percent it had predicted only three months before.

“Further,” says the head office of analysis and advice for 185 member nations, “world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record three percent or less growth in 2008 and 2009, equivalent to a global recession.”

Pretty much the entire globe has been downgraded by the IMF’s chief economist, Simon Johnson, starting with a “mild recession” in the United States. Which leaves him, oddly enough, scratching his head at the collapse of the U.S. dollar.

“The effect of the financial turmoil in the United States has been to lower the prospects of growth,” he said in Wednesday’s 2008 World Economic Outlook, “but somewhat paradoxically, it has also increased oil prices, metal prices, and, of course, food prices.”

Plunging property prices tend to go hand in hand — squeezing tight like a child in a crowd — with a falling exchange rate. Just ask British consumers about their 1990-92 slump in real estate prices.

Or ask them again, jabbing a thumb in their eye, about what’s happened to sterling since the latest house price slump began in late summer ‘07.

That’s why the sudden surge in the dollar of last August presented investors and savers with such a fantastic opportunity to get ahead of the curve and defend their wealth.

The initial surge in the dollar — which pushed the euro down from $1.38 to $1.34 by the start of September — came thanks to a dash for cash by the world’s biggest banks.

The U.S. dollar being the world’s No.1 money, cash equaled greenbacks. And selling everything else to raise money — for settling lost trades and client redemptions — the panic marked what might prove a last chance (during this dollar bear market, at least) to swap dollars for gold below $700 per ounce.

And now? The very week that the IMF said it’s going ahead with a gold sale of 400 tons (pending U.S. approval, which looks a dead certainty)? “It seems that dealing with the risks stemming from the behavior of private sector financial institutions may be the big focus for this coming weekend’s G-7 meeting in Washington,” noted John Hardy at Saxo Bank.

“There are some calls to include currency issues on the agenda, but the G-7 may once again have little to say on currencies, especially if the U.S. dollar is not trading at new lows as the meeting gets under way.

“Even if it is trading at new lows, real intervention beyond verbal remarks is likely some way off,” he concluded.

But the growing call for panglobal financial meddling looks sure to create a “Reverse Plaza Accord” sometime soon in the future:

“In view of the present and prospective changes in fundamentals,” said the communique of Sept. 22, 1985, issued by the rich G-5 nations from the Plaza Hotel in New York, “some further orderly appreciation in the main nondollar currencies against the dollar is desirable.”

Together, therefore, the big guns of the global economy “[stood] ready to cooperate more closely to encourage this when to do so would be helpful.”

Put another way — which was entirely the point — the G-5 would start selling dollars and buying non-U.S. currencies to cut down the looming “super dollar” that towered over the global economy.

(Those changing fundamentals, by the way, were that the United States had become a net debtor for the first time in 70 years. It’s barely looked back…)

What now might cause “close cooperation” in reversing this strategy, buying the dollar to increase its value, and thus aiding non-dollar countries struggling to bear the costs of the dollar’s six-year decline?

There is now agreement in the eurozone about the fact that the depreciation of the dollar is a problem,” said an unnamed French official to the International Herald Tribune back in December.

The finance wonks attending the next G-7 meeting “have to pass the same message to the market,” he went on. But so far — if they’ve passed on that message at all — it’s been ignored:

Of course, it’s not in the United States’ interest to see the dollar go higher.

If you owed $9 trillion and you owned the printing press, wouldn’t you be just fine with the idea of your debt being inflated away?

But the other G-7 cronies, not to mention the poor Asian and Middle Eastern economies that continue to pile up greenbacks and T-bonds every time they do business…might they want to see some kind of “Reverse Plaza” enacted — and soon! — to support their stockpile of dollars?

And with the International Monetary Fund standing ready to sell 400 tons of gold over the next couple of years, wouldn’t it make a great deal for the central banks of Beijing and Japan?

As the GFMS consultancy here in London points out, China holds barely one percent of its foreign currency reserves in gold at the moment. The rest, pretty much, is in dollars. The Japanese do little better, with a two percent gold holding. They just broke the $1 trillion mark in U.S. dollars, on the other hand.

If this swap — the West’s gold for Asia’s dollars — comes off sometime soon, you won’t have to simply stand by and watch this transfer of wealth as if helpless. You could join the big switch — out of dollars and into truly hard currency — starting today, if you wish.

Or you could wait for that communique from the Beijing Plaza Hotel.

Regards,
Adrian Ash
BullionVault
April 10, 2008

International Monetary Policy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.