Gold's Performance Relative to Dollar, Yen and Euro

February 06, 2009 | By: Richard Shaw

Gold is sometimes viewed more as a commodity for jewelry and electronic applications, and at other times more as a quasi-currency. It has an ancient history for both roles. As of late, gold has been taking on more of the alternative currency role.

Paper currencies pay interest, but physical gold does not. As the interest rate on paper currency approaches zero, the short-term opportunity cost of holding gold versus paper currencies becomes minimal (noting, however, that there are storage and security or management costs with gold).

Reasonable proxies for gold and currencies are: gold (GLD), Dollar (UUP), Yen (FXY) and Euro (FXE).

The 3-year weekly chart below uses “price channels” to identify the highest highs and the lowest lows for the twenty prior periods. It also presents a Fibonacci study that essentially marks the levels for an approximate 1/3, 1/2 and 2/3 retracement of the most recent peak-to-bottom price range.

click images to enlarge

3-Year Chart with Fibonacci Study

Theory would say that having retraced 2/3 of the prior peak-to-bottom, the current move is more likely to persevere than not.

One approach to identifying resistance and support levels is to find prior highs and prior lows. Price channels are one way to have a computer generate visual queues to resistance and support levels automatically. Just be sure the historical period for the price channels is what you want. Note also that prior consolidation areas tend to create resistance or support levels. This daily study uses price channels over 20 trailing periods as does the 3-year weekly chart above.

1-Year Chart with Resistance Levels and Trend Lines

Having pierced two resistance levels and flirting with a third shows great strength. The higher bottoms and higher tops is a favorable indication.

Gold is near twenty-year highs, having pierced several key resistance levels since its slide in Q4 2008. Some predict new highs ahead.

Here is a twenty-year monthly chart showing how gold performed on a percentage basis relative to the Dollar, Yen and Euro.

20 years

Gold may reach new twenty-year highs. A trend is a trend, until it is not a trend. On the other hand, every rubber band can only stretch so far.

Investor sense of success in the multi-national recovery programs may divert investor money flows to other asset categories, possibly slowing or capping the advance of gold. Alternatively, investor sense of failure by recovery programs would likely direct more money flows to gold, possibly extending its advance.

10 years

5 Years

1 Year

4 Months

Sometimes it is more informative to look at discrete periods of time, such as successive individual calendar years or groups of years, rather than cumulative periods of time. That is because of the persistent impact by past periods on cumulative returns, whereas discrete periods start fresh without the quantitative effect of the past.

The following charts show 3-year monthly performance for eight successive discrete periods beginning with 1999. Gold has been the superior performer in seven of the eight periods. The question remains, when has it gone high enough. So much may depend on the conduct of governments in the near-term.

3 Years Beginning 1999

3 Years Beginning 2000

3 Years Beginning 2001

3 Years Beginning 2002

3 Years Beginning 2003

3 Years Beginning 2004

3 Years Beginning 2005

3 Years Beginning 2006

Disclosure: The author holds a small allocation in gold via the ETF, symbol GLD, with a 10% persistent trailing stop.

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