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Interesting reading about gold prices

Two Charts Every Australian Gold Investor Should Understand
Happy new financial year, reader.
Our magnifying glass and detective cap tell us that gold traded flat overnight. Hmmm. We shook our magnifying glass a couple of times.

Nope, gold was definitely flat. US$927 per ounce.
We’re busy investigating. We’re searching for any stumbling block that might trip up the gold bull market. Not because we’re suspicious, but because that’s what you should do with your investments. Treat them with a suspicious eye. Gold, so far, is holding up pretty well.

Yesterday we noted that the continued de-leveraging of US markets is probably going to keep gold charging along. If you haven’t bought into the trend yet, it probably isn’t too late.

So shares won’t provide much resistance. The Dow and All Ordinaries linked arms and coughed up 16% each last year. What other competition does gold have for global money flows?

Currency? It’s pretty pathetic competition. If the US dollar is going to rise, it’s not going to be because interest rates go up.

Millions of US mortgages reset this year. Bloomberg tells us that the rate on a US adjustable rate mortgage has already risen from 5.3% to 6.08% in the last three months. For a homeowner paying off a US$200,000 mortgage over 30 years, their yearly repayments have jumped by around US$1000 in the space of 12 weeks. A bigger credit burden would mean a second level of hell for the US housing market.

Let’s simplify this: the assets that do the opposite of gold look like going down. That relationship isn’t perfect. But in the long run it holds up alright.

The US dollar is one of the reasons gold has risen so much. Yippee. Sounds good. But if you’re an Australian investor there’s a slight catch. You should spend a few seconds getting to know the charts below…and why they’re different…


An Australian gold price. This is the language that Australian gold diggers speak in. It’s similar to US gold, but a slightly different dialect. Take a look at the “classic” gold chart…the way gold is quoted by the media:


That’s over exactly the same time period. And they look pretty similar, don’t they? The difference is in the scale. Aussie gold is up 72% in five years. US gold is up 165%.

Let’s unpack that. The obvious disparity is the exchange rate. Thanks to monetary tightening and a bunch of expensive rocks lying around, the Aussie has doubled in value since the start of this decade. That eats into gold gains.

But wait a tick…we just said that the gold price goes up when the dollar goes down…
The thing to understand is this. Gold beats the US currency because you can’t print more gold. Ben Bernanke, in his own words, “has a technology called the printing press”. The inflation of US dollars devalues it in comparison to gold.

Australia’s currency has had a lot of demand in the last 7 years. Compared to gold, currency supply has still inflated. We also know of this printing press. But demand for the Aussie rose faster than demand for the greenback. So the Aussie went up.

The reason we blabber on about gold is because there’s another reason it goes up. One that overrides the currency loss that Australians suffer. One that pushes up Aussie gold as well as US gold.

The fear factor. When stocks are tumbling…bond yields are rising, pushing down prices…losses are haunting hedge funds….super investments are in the mud…real interest rates are negative…that’s when the currency effect has the least bearing on the gold price. For our purposes, anyway.

When the greenback falls, gold goes up simply because it’s quoted in US dollars. In the conditions we just described…gold goes up simply because people buy it. That means gold in all currencies. It has little to do with the dollar. And those conditions are the ones we see all around us at the dawn of the new financial year.