Saturday, September 08, 2012

Got Gold Report - Euro Close to All Time Low Purchasing Power Relative to Gold

HOUSTON – Gold is breaking out of long period consolidations. Lots of them.  For example, gold in terms of Euros is getting close to its all time high.  The Gold:Euro exchange rate is challenging its February turning high and appears to be breaking out of a wide triangular consolidation as evidenced by the graph below which compares the gold price to the Euro Index (as a proxy for the Euro itself). 



Breakouts (or breakdowns) from long-period consolidations indicate that the myriad conditions which conspired to contain the trading within the technical pattern are now changing.  Breakouts are a signal that money flow has turned positive for the issue, meaning more liquidity is flowing into it than out of it. 

Triangular consolidations are often continuation patterns that resolve in the direction of the prevailing trend sooner or later. 

Note the label “Euro Crisis 2011-2012?”  The question mark is not whether there has been a crisis for the period; that is self-evident.  It is there to denote our skepticism that the European crisis ends this year.

With European reliance on socialist central planning, technocrats and anti-productive, highly producer-discouraging tax policies, we seriously wonder whether the crisis on ‘The Continent’ will end this decade.  

For contrast, below is the same chart using the Canadian Dollar Index as a proxy for the Loonie. The smaller, but better-managed (so far) Canadian Dollar reflects market perceptions that the government in Ottawa has been more responsible and somewhat less profligate than their neighbors to the immediate south. Thus, the Canuck buck is farther from challenging its purchasing power lows (gold purchasing power highs) than the Euro, but clearly it too is breaking out of a consolidation.


Compare both the Euro and the Canadian dollar to the Gold:USD ratio using the USDX (DXY) as a proxy for the greenback in the chart below.

Unleash the Money Printing Hounds

Clearly gold is once again gaining purchasing power in most or all fiat currencies.  The charts above are irrefutable proof of it. Probably no one believes that is just a random effect, or a movement on the market’s whim.  The very powerful consolidation breakouts are answering something the market has been anticipating. Put simply, the collective market has been anticipating that governments would attempt to “print their way out of a giant debt hole.”

We can point to one trigger across ‘the pond,’ with the European Central Bank announcing its intention to do “unlimited bond buying” for a 3-year period, ushering in a new round of fiat money printing. Other catalysts include less than good economic data here in the U.S., the U.S. presidential election now just two months away with the U.S. headline unemployment rate still over 8% and the incumbent’s chances for reelection flagging ... along with statements by the Federal Reserve that poor U.S. jobs performance is of “grave concern.”  

Those and similar signals are all hinting that the Fed intends to do additional accommodative monetary policy action (more Q.E.) soon, perhaps in their September gathering.  The Federal Open Market Committee (FOMC) statement from that meeting is expected September 13, one day after the German Constitutional Court rules on the constitutionality of the proposed monetary constructs of the European central planners.

The consensus is that the German court will find a way to throw the Maastricht Treaty constrictions and sound money rules that induced inflation-paranoid Germany to sign on in the first place under a double-decker bus, enabling the elites in Brussels to, as ECB high priest Mario Draghi put it, “do whatever it takes to preserve the Euro.” 

Our own opinion is that if the German court does find a way to thread the rule needle to allow ECB bond buying – in any form – it is akin to our own U.S. Supreme Court stretching and contorting it’s own role under Chief Justice Roberts to find the only way that 'Obamacare' could be ruled constitutional.  We can only guess that such a ruling would also sow the seeds of mass discontent in Germany just as the Robert’s 5-4 majority opinion has here.   

Add to that increasing expectations of monetary stimulus in China despite a change in government to occur shortly, and witness the collective market attempting to price it all in, in advance – in the form of breakouts by gold to consolidation patterns aplenty.    

Race to Debase 

Currency debasement (increasing the amount of money – fiat currency - out of nothing in order to buy government debt is one example), is “bullish” for gold (and silver) as investors seek to protect wealth and preserve purchasing power.  At the same time, governments seek to diversify their reserves out of deteriorating fiat currencies and into other, tangible assets, including gold.

The best evidence of that has been central banks becoming net buyers of gold at a 500-plus tonne per year pace lately and heavier than ever imports of gold through Hong Kong into China.  (The amounts are large enough to suggest that the government of China is ‘secretly’ increasing their gold reserves, to be disclosed at some future date when Beijing believes it will be to their advantage to disclose it.)    

As a side point, we note once again that it is gold that stands the test of time as trusted universal money.  Fiat currency exchange rates to gold are merely the markets attempting to price paper currencies more in line with their overly-diluted supply relative to the naturally limited supply of the yellow metal.  Soon the same will be true for silver in our opinion.  It already is to a small degree. 

Note that the Euro (represented by the first chart), which has been in crisis mode for the better part of a year and a half, is the closest of the three currencies to reaching a new low in purchasing power relative to gold (a new high in gold purchasing power relative to the common European currency).

The chart below is a more intuitive representation of the evaporating purchasing power of the Euro.  It shows the acceleration of the Euro’s loss of purchasing power since the 2005 breakout of gold in all fiat currencies – reflecting the market’s realization that politicians were no longer even pretending to keep a lid on money printing.

As long as the electorate are ignorant of it; as long as politicians and central planners could get away with extreme over-promising and over-spending, their unspoken and likely for many unrealized attitude has had to be:  Why not destroy the currency as long as it results in reelection? 

The fact that it has taught three generations of people to expect more than is actually sustainably possible from government; the fact that it has doomed a large fraction of the population to a new kind of social slavery and government dependence is just not relevant to the short-sighted, have-to-get-reelected-to-retain-power pols - yet.   

Without high price-inflation and its attendant social chaos showing up to give them away (as it did in the 1970s), why should the politicians even bother to change their tax, borrow and spend to get elected stripes?  With only a few courageous exceptions in Congress, the American people have continued to elect the pols who promised them more and more government goodies – no matter the consequences.  Instead of voting for good government leadership, the American people have collectively fallen for the Big Lie – that more and more government and less of a free market is the answer to all their ills. 

As H.L. Mencken warned, they have gotten exactly what they asked for "good and hard."

Price inflation is evident to just about anyone who shops, eats or uses energy (just about everyone).  But it is tame according to government statistics – so far.  But that’s where gold comes in and that’s partly why the government and central planners ridicule and manipulate gold where and when they can – where and when the market will let them.  Gold is a forward looking barometer.  It reflects the monetary inflation (debasement and dilution of currencies) that has already occurred, with a lag.  Gold predicts the coming inevitable price inflation that always follows monetary inflation sooner or later.  In 2002 gold finally started answering the monetary inflation that governments all over the world racked up in the 1980s and 1990s as it accelerated right after 9-11 (2001).    

Since 2005 monetary inflation has gotten much worse and the world’s inflation barometer, gold, has picked up the pace of its reflection of it.  When the global supply of paper, electronic and digital currency explodes higher there is much, much more of the paper currency to be divided into a relatively finite amount of gold.  In truth the amount of paper currency is growing at a much faster rate than the 1% to 2% per year of gold that can be added through new mining and production. The result of politicians’ and central planners’ profligacy has been that it takes more and more of the easily “printed” paper and binary chits to “buy” an ounce of gold.

Hope for Change (But Prepare for More of the Same)     

With the focus likely to turn back to the extremely high and rapidly rising accumulated national debt in the U.S., now more than $16 trillion, we cannot be surprised to see the Gold:USD ratio (third chart above) playing a game of “catch up” to the Euro in terms of new lows in dollar buying power (highs in the USD price of gold), especially if the Federal Reserve announces more Q.E. in its next FOMC meeting just ahead on September 13. 

If the Fed disappoints or throws the gold market a curveball, it could cause a short term pullback in gold, but we think it is important to remember that the currency debasement underway is not just USD-centric.  The ‘race to debase’ involves multiple sovereign contestants this time, similar to the 2005 period which opened the gold bull market floodgates.  That 2005 event was an important, conclusive signal that our global experiment with under-backed fiat paper currency – where not even one official currency was backed by gold - has entered the terminal phase.   

We believe it is helpful to view the gold market through a longer term, monthly lens. Doing so eliminates some of the technical “noise” and allows major, longer-term secular trends to show clearly.  For the last year gold has been consolidating its September, 2011 Eurozone-crisis-inspired thrust to $1,923, finding overwhelming support near $1,525 after a roughly 20% correction.
The 2011-2012 correction/consolidation for gold appears “normal” in this longer term monthly chart for gold in that context, in our humble opinion.


It sure does also appear to be resuming its longer term trend if the chart just above is any guide.  As of Friday, September 7, gold is within spitting distance of its 2012 high monthly close in January of $1,739.10.  A close of $1,793 or higher (about 3.2% higher than Friday’s close) would mark a new high for the year.  

Gold closed the year 2011 at $1,564.80 on the Cash Market.  It is “up 11%” since then closing Friday, September 7, at $1,737.60.  Well, actually, we should just say it now takes about 173 more paper dollars to exchange watered down greenbacks for real money – thanks to the U.S. Congress’ lack of adult supervision and their total disrespect for what our currency used to be.

As our friend Rick Rule says, the U.S. Congress has become a lair of counterfeiters.  One thing, and perhaps the only thing that will stop them is a full blown currency crisis, in our own opinion.  The breakout of gold in all currencies in 2005 was a sign that Big Smart Money all over the world began to accept that a currency crisis is coming. 

The most recent breakout of wide consolidation formations on technical charts (instead of the consolidations breaking down) could be signaling that we have entered another accelerated phase of currency confidence destruction. 

It also very well could be a sign we are that much closer to when the central planners can no longer control the inflationary forces they have taxed, borrowed, bought and paid for on our behalf. 

The good news is that at least today the massive government debt, the gigantic trillion-dollar-plus deficits, the runaway government spending, the crippling, job killing over-regulation, confiscatory taxation and the U.S. Federal Government erosion of our freedom are all now in the public debate (and much higher on the political priority totem pole than they used to be).  It is a long overdue debate in our opinion.

Believe it or not, that is one of the longer-term positive signs we take some comfort in. 

Heck, gold even made an appearance as a plank in the GOP platform for the first time since the 1980s. Even if it is only to form a commission to study the feasibility of returning the dollar to a gold standard, it is a triumph of Congressman Ron Paul who has been a lonely, courageous voice in the Washington political wilderness for sound money.  That it shows up now is also a klaxon sounding to all of us that gold has repaired a lot of the psychological damage that occurred to it following its mania-blow-off top, its collapse in January, 1980 and the 20-year bear market that followed.  

The long-term positive signs include gold’s acceptance as cash-equivalent collateral in multiple venues and perhaps even on bank balance sheets as a tier-1 asset beginning this coming January.  

A new gold standard may or may not be adopted in the near future, but just as it has for more than four millennia, gold is reasserting its historic role as money of the first and last resort globally, regardless of what the central planners say or think about it – just as we have been saying it would since 1999. 

Until the elimination of the income tax on capital gains for gold and silver (which is actually a tax on dollar depreciation), neither gold nor silver can be considered as true currencies, but perhaps that (elimination of the income tax on gold and silver) is also something we can look forward to if we choose well in November.  Senators Rand Paul (R-Ky), Jim DeMint (R-SC) and Mike Lee (R-UT) as well as other real leaders in Congress have already proposed such a measure (Sound Money Promotion Act), so it’s not at all farfetched to suggest it.  Consider how arrogant and evil it is that the politicians who write the tax laws can destroy the value of our currency and then collect a tax on the one “currency” that appreciates on account of their bad stewardship. 

Politicians first ruin the money we are forced, at the point of a gun through legal tender laws to use, and then charge all of us a high tax because of it.  There ought to be a special, very acrid, sulfurous, extra hot place in Hell for those pols…  We need to show the “good guys” our moral and financial support – to let them know they are on the right path – right now, while they can still benefit from our support. 

We’ll leave it there for now, except to say:  Stay informed and vote responsibly.     


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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