Gold and Precious Metals

Is gold in a bear market?

Most people would say that gold has been in a bear market, with a falling price, for the past two years. But it’s not as simple as that. The timing of the price peak and the size of the subsequent decline depends on which currency is used to price gold. In at least one currency the price keeps climbing to record highs.

The gold price is most usually quoted internationally in US dollars. This makes sense. Gold is traded in a truly global market, and like it or not the US dollar is the most internationally recognised “paper” currency. At the time of writing the gold price was US$1,336 per troy ounce.

Of course, Gold is also traded in different units of weight to the troy ounce, depending on the location in the world. I’ll use metric grammes to provide a comparison.

A “troy ounce” is 31.103 grammes (rounded to three decimal points). But a “tola”, used in India and Pakistan amongst others, is 11.664 grammes. A “tael” is 37.5 grammes in Taiwan, Vietnam and Japan. But in Hong Kong or Singapore a tael weighs in at 37.799 grammes. Then there’s the “baht” from Thailand, which is also the name of the local currency, which consists of 15.244 grammes. Confused yet?

But let’s get back to prices. Measured in US dollars the gold price peaked on 7 September 2011, when it closed at $1,894 per troy ounce. Therefore it’s down 30% over 23 months, as shown in this five year chart.

Gold price peaked on 7 September 2011, when it closed at $1,894 per troy ounce.
Gold price peaked on 7 September 2011, when it closed at $1,894 per troy ounce.

That’s clear bear market moment. Although it could just be a pause in a longer bull market, as with the 1974 to 1976 period when the gold price halved before rocketing to new highs.

 Around three quarters, perhaps more, of global physical gold demand comes from “emerging markets”.

But what if we look at gold measured in other currencies? After all, only 5-6% of physical gold demand comes from the US, so why do we always measure gold in US dollars? Around three quarters, perhaps more, of global physical gold demand comes from “emerging markets”.

The biggest sources of demand are India and China. This is perhaps unsurprising since they are the biggest countries in the world, and both have a strong cultural affinity to gold.

But there is also strong demand in other parts of Asia, the Middle East and Latin America. This emerging market demand comes from a mixture of private purchases of jewellery, investment in coins and bars, and central bank demand.

So let’s look at the picture in a range of other currencies. The next chart shows gold’s price performance since September 2002 measured in US dollars (USD, orange line), Indian rupees (INR, green), Pakistani rupees (PKR, red), Argentine pesos (official rate, ARS, dark blue) and Egyptian pounds (EGP, light blue).

Gold price Different Currencies

Of course these non-dollar currencies have something in common. They have all been weak. But the dollar (and the euro, and the pound, and the yen and….) could soon follow them. In fact there are some striking similarities already between the way the USA and Argentina run their finances. This is not a good omen for the dollar in the long run…and Japanese policy is blatantly and transparently about devaluing the yen.

…gold price topped out at different times depending on which currency it is measured in.

Looking at this chart more closely we can see that the gold price topped out at different times depending on which currency it is measured in. The peak came in September 2012 against the Indian rupee, a full year after the US dollar price peak.

Against the Pakistani rupee and the Argentina peso (of which more in a minute) the peak was October 2012. And measured in Egyptian pounds it was February of this year, just six months ago.

Is gold in a bear market?

So this is what I mean when I ask how long the gold bear market has been going on. In US dollars we’ve nearly reached the two year point. But measured in Egyptian pounds it’s a quarter of that time. And given the recent turmoil in Egypt I’d bet that owners of portable gold wealth, such as coins, feel more secure than those without it.

But let’s get back to those Argentine pesos for a minute. Argentina is the 8th largest country in the world, putting it between India and Kazakhstan. It’s rich in natural resources, including farmland, but only has a population of 41 million people. Its people should be incredibly rich.

Argentines try to protect their wealth using real assets such as property (houses, apartments or land), gold and art.

Yet successive populist governments have done a great job of screwing up the economy, creating regular financial crises and currency devaluations. For this reason many Argentines try to protect their wealth using real assets such as property (houses, apartments or land), gold and art. (You can learn more about asset classes in our free Wealth Workout report that you can download here)

US dollars are also popular, but the current government has made it impossible to buy dollars legally since late 2011. With price inflation running at around 25% a year, a large black market economy, and peso savings accounts that pay 10-15% less than inflation, there is plenty of demand for dollars.

Enter the so-called “dolar blue”. This is the parallel exchange rate that Argentines must pay in shady back rooms if they want to convert their pesos into dollars. At the time of writing the official exchange rate is 5.56 pesos to the dollar. But the blue rate is 8.90, meaning a 60% difference.

At official rates peso exchange rates gold is up 6 times since September 2002. That was shortly after the last major crisis and devaluation (and debt default). But measured using the “blue” rate gold is up 10 times.

Put another way, gold priced in official Argentine pesos peaked in October 2012. But priced using the parallel rate it has continued to climb, and is now 7% higher than October 2012.

Gold has been in a bear market. But the size and duration of that bear market depends on which currency is used to price it. In a world where demand from the USA makes up only 1 ounce out of every 20 that change hands it pays to remember this.

There are many people in the world that continue to be happy holders of gold. Even those that measure their wealth in US dollars may return to that status one day…perhaps soon. Here at OfWealth we continue to recommend that you own some gold. Wherever you live.

Let us know your thoughts in the comments below.

Stay tuned OfWealthers,

Rob Marstrand
robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.