The most important aspect to understand about BULL MARKETS is the proper definition
– for a bull market to occur, the item must rise in terms of ALL currencies otherwise it is merely adjusting for local conditions.
Illustrated above is gold expressed in a basket of currencies and dollars. While everyone was so bullish on gold and calling for it to go back to $1,000 after 1985, these two charts showed why gold was NOT in a bull market and the trend was merely being disguised by 40% swings in the currency.
Right now, despite the Indian government’s best efforts to curb their citizens from buying gold, the black market for gold is rising. This is not because gold is in a BULL MARKET, it is because of the plummeting rupee. This is the same problem we had with gold following 1985 and the formation of the G5 who publicly declared they wanted the dollar to decline by 40%. Gold rallied, but only in dollars. In terms of a basket of currencies, it was still declining and continued its bear market into 1999.
Right now, gold hit a nine-month high on India’s domestic bullion market over the weekend. This is NOT bullish for gold in dollars, only in isolated terms of the rupee. When we look at not just the capital flows, but the movement of gold and where it goes the facts are interesting and support what has been going on in Asia. Yes, the gold ETFs hit a record of some 2,632 tonnes (93 million ounces) in December 2012. However, during the first half of this year, the outflows of gold reached about 670 tonnes. The selling of gold continued until August with the losses amounting to nearly $60 billion.
If we look closely, the gold that flowed out of the UK moved typically to Switzerland where the refiners are located. This was almost 800 tonnes for the first half of the year. For the same period, that flow was only 92 tonnes for 2012. From Switzerland, the gold typically moves to then Hong Kong. But the outflow from the Swiss was less than half that meaning that more than 400 tonnes remained in Switzerland.
Therefore, almost 400 tonnes flowed to Asia. This has been a hedge against the falling Asian currencies rather than a buying for the sake of expecting gold to rally to new highs right now. We are dealing with localized currency issues. The catalyst for the real BULL MARKET in gold will come most likely after 2015.75 when people begin to question government on a more worldwide scale (assuming Obama does not start World War III to cover-up the debt crisis). Ask the average person if he thinks the US government will not honor its obligations and they will ask you if you left your tin-foil hat in the car.
Understanding that it is not just gold that rises when a currency declines, but all tangible forms of assets including stocks and real estate is vital to your financial survival. Even when there was the hyperinflation in Germany, the new currency that replaced the inflated currency was backed by real estate – not gold. It is everything that rises since everything has an international value be it labor or property that ultimately attracts capital. Companies are moving back offices to Poland because they have an educated work force, are politically stable, and are very cheap. China began seeing jobs move to the Philippines and India because their labor began to rise and the quality was questionable in many areas.
I saw London real estate in British pounds at record highs in 1985 when the pound fell to US$1.03. Foreign capital poured in while local capital could not see the international value since they were still viewing it in pounds, not through the eyes of dollar investors.
Currency is a language. If I said I will give you $1 trillion Zimbabwe dollars during the inflation, you would have pick up a paper to try to figure out what that was worth in your own currency. Then and only then could you make a judgment of value. No matter what you think about money, even the wildest gold promoters express their projections still in dollars to give you an idea of value. That is how we measure wealth – not in gold. We do not recalculate into grams of gold. We see our local currency as the measurement of value. India is doing the same thing.
