-- Published: Friday, 4 January 2019 | Print | Disqus
By David Brady, CFA
Just as Neo flexed his muscles upon learning he is “The One” and took out Agent Smith at the finale of The Matrix , Gold is now letting fiat currencies know who is really in charge.
Many take credit for anticipating Gold’s ascent from the lows in August, and yet they cite all of the wrong reasons for its appreciation: peak DXY, peak USD/JPY, falling real yields, speculative buying, and so on. The truth is that Gold is doing its own thing and taking matters into its own hands. We know this because Gold isn’t just rising against the dollar or the euro or the yuan, it is soaring against ALL major currencies.
Below is Gold’s performance against all of the major currencies since it bottomed on August 16 th:
Gold has risen significantly against them all by over 10% on average. Its gains are not solely against the dollar or yuan due to U.S.- or China-specific policies, but against ALL of them. What is the common denominator here? Gold.
Retrospection can be extremely informative in terms of where we’re headed next. Most of my readers are familiar with this equation:
XAU/USD = XAU/CNY divided by USD/CNY
When XAU/CNY was relatively fixed within a range, Gold in dollar terms was almost perfectly correlated to USD/CNY on an inverse basis. This is what happens when one variable in an equation is fixed. Then something strange happened on August 16 th. XAU/CNY bottomed at 8084 and proceeded to rise from that point forward. At the same time, USD/CNY became fixed in a range of 6.78-6.98, as a stalemate developed in the trade war between the U.S. and China. This meant that XAU/CNY and XAU/USD became directly correlated. It was no coincidence that both bottomed out the same day.
Then on October 11th, the following occurred:
Optimism that the trade war between the U.S.and China could be resolved sent Gold soaring through its 200-day moving average against the yuan. The huge white candle in the XAU/CNY that day suggested the low was in. This was followed by a successful backtest on November 12 and 13 that appeared to confirm the low was in, and it hasn’t looked back since. Gold in dollar terms lagged the move in XAU/CNY, but given the new direct correlation, it, too, just went higher.
But Gold isn’t just rising against the yuan, it is rising against all the major currencies. Gold is the common denominator in all cases, which makes it clear that Gold is driving the bus now. Why would Gold rise against all fiat currencies? Since October, it has become clear that the global stock markets cannot rise without increasing liquidity and that economic activity is deteriorating worldwide. The market is anticipating that the central banks will be forced to turn on the monetary spigots again—print currency—to prevent a total collapse of the markets and the monetary system itself. Gold soars in such an environment.
Regardless of what the cause is, Gold is asserting its status as the supreme money in a fiat currency system, which is a significantly positive development and may signal the end of the paper markets’ control of precious metals’ pricing. If so, the sky is the limit.
That said, Gold is unlikely to go up in a straight line. We will get healthy pullbacks along the way for sure. For example, Gold is becoming increasingly overbought in the short-term. I recommend using such pullbacks to add, rather than try to short the market. Whereas stocks have become a sell-the-rip market, it’s all about buy-the-dip in Gold for now.
One final caveat: Although the bottom in Gold appears to be in place, should trade tensions between the U.S. and China escalate dramatically, the risk remains that USD/CNY could break out of its current range and break the critical 7 level. If XAU/CNY declines at the same time, or worse, falls back below its 200-day moving average, then Gold could still go a lot lower. But we know what to watch for now: USD/CNY and XAU/CNY. How they both behave going forward will tell us where Gold is headed.
As always, long-term, Gold, and especially Silver, are going much, much higher, in my opinion. If USD/CNY and XAU/CNY continue to behave as they have since August 16 th, then the massive rally in Gold that we have always expected has already begun.
| David Brady has managed money for over 25 years for major international banks and corporate multinationals both in Europe and the US, with experience in Bonds, Equities, Foreign Exchange, and Commodities In 2016, he created GlobalProTraders.com, an interactive online community for traders to share their views on financial markets. |
