GOLD’S SECULAR PERFORMANCE AND VALUING CURRENCIES VIA GOLD

GOLD’S SECULAR PERFORMANCE

The preceding exercise enabled investors to obtain a clearer picture of cur-rencies’ performances by valuing them against gold. Yet we could also ag-gregate each of the individual currencies’ return performance against the price of gold to obtain gold’s total performance for a specific period.

Figure 1.7 illustrates gold’s aggregate annual returns against AUD, CAD, CHF, EUR, GBP, JPY, and NZD from 1999 to 2007 and the first five months of 2008. The chart shows a gradual increase in gold’s aggregate an-nual growth from 1999 to 2001 before slowing the pace of growth in 2002 and 2003. Gold’s aggregate growth rate was a negative 8 percent in 2004 before soaring by 239 percent in 2005. Growth was nearly halved in 2006 to 124 percent, then edged up to 145 percent in 2007. Since those returns are

FIGURE 1.7 Gold’s aggregate annual return versus AUD, CAD, CHF, EUR, GBP, JPY, and NZD illustrate the metal’s broad performance between January 1999 and May 2008.

the aggregate of individual gold returns in distinct currencies, gold’s perfor-mance is generally a function of the performance of individual currencies and paper currency in general.

By exploring the annual growth rates in detail, we note a sensible explanation to each of the moves. The 25 percent and 37 percent re-turns in 1999 and 2000 were clearly on the low side of the 82 percent annual average registered between 1999 and 2007. In those years, gold was under the dominance of a multiyear bull market in equities founded on low inflation and steady growth. Such were suitable ingredients for shutting investors’ appetite in the precious metal. In fact, gold prices fell 6 percent in 2000 against the greenback, concluding a nine-year market. The following year, 2001, was the first in nearly a decade in which gold would rise against all of the major eight currencies. This increase was due to a combination of an ensuing bear market in U.S. and world equi-ties as well as a general slowdown in the global economy. The Septem-ber 11 attacks also had a role in lifting gold as investors sought refuge in its safe-haven status at a time when a major financial center was under assault.

Gold went on to rally in 2002, before showing a mere 15 percent in-crease in 2003 and an 8 percent decline in 2004. Since these returns are an aggregate of gold’s individual performance against several individual

currencies, the main driver to gold’s retreat in 2003–2004 was the individ-ual performance of each of the currencies. The common theme in 2003 and 2004 was broad dollar weakness. Thus, despite gold’s modest showing in aggregate terms, it rallied 24 percent and 20 percent against the dollar. The rally halted in 2004 when global central banks began raising interest rates. But in the secular bull market in commodities, China’s voracious appetite for metals and gold triggered an 18 percent advance against the dollar and a 239 percent rally against all eight currencies. Gold’s bull market extended into 2006 and 2007 on a combination of deteriorating economic and finan-cial conditions in the United States and a general shift of global investor capital into rising commodities such as gold and oil.

VALUING CURRENCIES VIA GOLD

While Figure 1.7 illustrated gold’s aggregate returns over a 10-year period, we could also use gold to compare currencies’ performances across dif-ferent periods. Figure 1.8 shows how gold fared in 2000 against the eight different currencies. Note how gold’s two highest rates of returns occurred against the so-called commodity currencies of Australia and New Zealand due to the 2000 price slump in wheat, copper, and dairy products, all of which are primary sources of export revenue for these two countries. Con-versely, gold showed the highest negative performance against the USD, followed by the CAD, which helps traders conclude that the USD was the

FIGURE 1.8 Gold’s highest returns in 2000 fared against NZD and AUD, reflecting the slump in dairy products, copper, and wheat, primary exports in New Zealand and Australia.

FIGURE 1.9 Gold’s 2007 currency performances were almost a mirror image of 2000 as the commodities rebound lifted NZD, CAD, and AUD at the expense of USD.

highest-performing currency against all other currencies, with the CAD in second place.

It is important to note that currencies’ ranking against gold does not always imply a similar ranking against one another. A few exceptions have occurred, such as in 2000 when the Swiss franc fared as the third-worst underperformer against gold due to the Swiss National Bank’s sales of its bullion. In that year, however, the Swiss franc stood as the second-highest performer (after the U.S. dollar) when measured in aggregate terms against all seven other currencies.

please read also : GOLDEN CORRELATIONS AND DON’T FORGET FALLING GOLD PRODUCTION

Fast-forwarding seven years ahead, we find a largely different picture for gold in 2007. Gold had not only outperformed all currencies—reflecting the emerging bull market in the metal and commodities in general—but also showed the relative performance of currencies during the year. Put in another way, the 2007 relative performance of currencies was the near op-posite of 2000, dominated by the commodity boom as well as commodity currencies. Similarly, with the U.S. dollar underperforming all major cur-rencies during the commodity rally, gold showed the highest performance against the greenback. (See Figure 1.9.)

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