By Stefan Wieler and Josh Crumb from GoldMoney.com
The full report can be accessed here
as PDF
Inflection
Points
Introduction
Gold prices
in USD have rallied strongly in recent weeks, up 18% year-to-date. Gold prices
in other currencies look similar; of the 20 most traded currencies in the
world, gold is up in all of them. In the media and in finance, as with most
exchange-traded commodities, gold is almost always quoted in USD. Hence, as
gold prices in USD moved lower over the past year, many remained under the
impression that gold was in a downtrend. However, when we look at gold priced
in the 20 most traded currencies in the world, in 80% of them, gold showed a
positive performance over the past two years. But does that mean gold in these
currencies has resumed its long term upward trend? In order to find that out,
we have created a set of intuitive rules to define inflection points at which
gold prices decisively change direction. We find that in 55% of the world’s
most traded currencies, gold has re-entered a clear uptrend.
Gold prices
in all currencies saw their peaks somewhere in 2011. What followed then was a
more or less sharp decline, but unlike for gold priced in USD, gold priced in
most other currencies troughed in late 2013 to early 2014 and has been trending
higher since. We find that for the world’s major currencies, uptrends tend to
last about 4.5 years on average during which gold prices increase by more than
100%. 95% of the world population does not use the USD as local currency and is
not paid in USD. Saving in gold has helped them to protect their wealth as
their currencies resumed their long-term decay. In the end, this is the path
all fiat currencies follow as their purchasing power declines. Gold is the only
money that has held its purchasing power over time. Indeed it is the only money
that has survived throughout history.
While the
USD and a few other currencies have so far been the outliers, prices have
reversed sharply as well. Applying our set of rules to the USD, we find that
gold has entered an uptrend as well as long as prices remain above $1165/ozt,
roughly USD100/ozt below current levels. Historically USD gold uptrends lasted
over three years and pushed gold prices up more than 200%.
Inflection Points
Gold prices rallied strongly in recent weeks in all major
currencies. In the 20 most traded currencies, gold is up between 13% and
23%year-to-date (see Figure 2). Unprecedented central bank action had pushed
gold priced in USD to an all-time high in 2011 but since then gold prices
trended down as longer dated energy prices moved sharply lower and USD real
interest rates have recovered from negative levels. (We explain how
longer-dated energy prices and real interest rates affect gold prices here.) In
the media and in finance, as with most commodities, gold is almost always
quoted in USD. Hence, as gold prices in USD have moved lower over the past
year, many remained under the impression that gold was in a downtrend. However,
a quick analysis of the year-over-year performance in gold shows that this view
is not warranted (see Figure 2). Last year, gold was flat or up in half of the
20 most traded currencies in the world. And it’s up with double digit returns
in all of them so far this year.
But does that mean gold in these currencies has resumed its
long-term upward trend? In order to find that out we have created a set of
intuitive rules to define inflection points at which gold prices distinctively
change direction. An inflection point is defined by two things: 1) the first
derivative of the 200-day moving average changes sign; and 2) there must be a
5% price change in the 200-day weighted moving average between two inflection
points.
The first rule simply says that the inflection point (the
point where gold ceases to be in a downward trend and enters an upward trend or
vice versa) is where the 200-day weighted moving changes direction, from down
to up or up to down. What is the 200 day weighted moving average and why are we
not simply using spot prices? The 200 day weighted moving average is the
average price of gold in a currency over the past 200 days, where the last day
is weighted with 1, the day before with 1-1/200 and so forth. The advantage of
the 200-day weighted moving average of a price is that the price history is
much smoother than just the daily price. Daily prices tend to be volatile and
change direction all the time. Hence over the analyzed period of 45 years since
1971, we could not positively identify long term trends as there would be
thousands of inflection points.
But even with the 200-day weighted moving average, there
will be some shorter periods where the curve changes direction without
establishing a clear trend change. That is where the second rule comes into
effect: An inflection point is only confirmed when the performance of the
200-day weighted average exceeds 5% (or -5% respectively) in the new direction.
In a nutshell, we define the local extrema where prices move in one direction
for at least 5% until the next local extrema. This rule allows us to identify
clear and sustainable trends. Once gold prices in a particular currency have
entered an upward trend, these trends tend to last for several years.
Before we show the results for all currencies we take a
closer look at gold in USD. The results for the USD are presented in figure 3.
There have been eight upward trends and eight downward trends since 1971. The
average trend lasted around 2.9 years where up-trend lasted slightly longer
than the average down-trends. The average uptrend yielded a performance of
207%, the average down move a performance of -39% measured by the 200-day
weighted moving average. Despite the recent rally, it is still too early to
determine whether gold in USD has re-entered an uptrend. Should gold prices not
drop below USD1165/ozt over the coming months (almost USD100/ozt below current
levels), a new uptrend will be confirmed.
By choosing the 200-day weighted moving average, we minimize
the number of trend changes, which allows us to identify the long term trends.
But the downside is that inflection points will only reveal themselves well
into the cycle and the inflection points on the 200-day weighted average are
lagging the true troughs and peaks (spot prices). For example, the lasted peak
in USD gold prices was in September 2011, but the 200-day weighted average only
changed trend in March 2012. In order to reduce the time lag we ran the same set of rules
but used a 50-day moving average instead. This time series is more volatile and
hence shows more frequent trend changes. By analyzing the 50-day moving average
indicated that gold in USD has already re-entered an uptrend.
For other currencies the case is much more decisive. In
euros for example, the 200-day weighted average made a low in June 2014. The
respective trough in the spot price was in December 2013. Since then prices
moved up 33%. The picture is similar for gold priced in Canadian dollars, where
prices are up 34% since the low in 2013. If historical performance is a good
indicator, these trends will continue to last for another two years and should
push gold prices substantially higher.
Applying these rules to the 20 major world currencies (20
most traded currencies according to the Bank of International Settlements), 55%
are now thoroughly in an uptrend (see Table 1). Of those currencies where gold
is still trending down, both the Hong Kong dollar and the Chinese yuan are
quasi pegged to the USD, so that shouldn’t come as a surprise. Excluding those
shows that in 2/3 of the world’s major currencies, gold is in a sustainable
up-trend. Table 1 shows how gold in the 20 most traded currencies has performed
through the up- and down-cycles since 1971 (some currencies with smaller price
history show shorter time-frames). On average there were eight up- and seven
down-trends. The up-trends lasted 4.5 years on average, the downtrends only two
years. Gold prices in their respective currencies were up anywhere from 133% to
several thousand % on average during an up-cycle, but only down between -24%
and -40%.
Gold has undoubtedly been a better store of value than any
currency over any prolonged period in modern history. After the sharp price
rise in the aftermath of the 2008-09 credit crisis, gold prices in all
currencies went through a period of consolidation. We believe, this was partly
because gold prices overshot to the upside and had to correct. In addition, the
sharp decline in energy prices has created negative headwinds for gold prices
in all currencies. These headwinds seem to be mostly behind us as longer-dated
energy prices have now reached unsustainable levels. (See our previous report
on this topic here.)
Gold prices in most currencies have thus resumed their long
term upward trend. 95% of the world population does not use the USD and is not
paid in USD. Saving in gold has helped them to protect their wealth as their
currencies resumed their long term decay. In the end, this is the path all fiat
currencies go as their purchasing power inevitably declines. Gold is the only
money that has held its purchasing power over long periods of time and indeed
is the only currency to have survived through history.
The USD and some USD-pegged currencies have been the
standouts of late as they appreciated vs other currencies as well as gold for
the past few years. However, with gold prices now firmly higher, gold in USD
has likely re-entered the uptrend as well. Our historical analysis implies
there is much more upside still ahead.
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