"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, June 16, 2011

Gold very strong in terms of the Euro

Investors fears concerning the nation of Greece with a potential for default on its bonds has kept a very firm bid beneath the price of Gold on the Continent. As you can see on the chart, gold priced in euro terms is within a whisker of its recent all time high. It is this strength which is preventing the Comex gold bears from substantially breaking down the price in US Dollar terms even as we are seeing a general selling theme across the commodity complex today.


  1. Dan, I don't understand your emphasis on the price of gold in EUR (or any currency apart from USD). The Law of One Price applies to the gold market, right?

    The price of gold in USD right now is 1528.5.
    EURUSD is 1.42.
    1528.5/1.42 = 1076.41, which is the theoretical price of EUR gold. The actual market price of EUR gold right now is 1076.1, which is almost exactly the same as its theoretical price.

    What you seem to be saying therefore is that EUR has fallen against USD over the last few days. Gold in EUR terms has therefore increased by the amount that the Law of One Price would dictate.

    What am I missing here?

  2. "The price of an ounce of gold in U.S. dollars is measured as $/ounce of gold. In foreign countries, the price of an ounce of gold is measured as FC/ounce of gold (where FC denotes "foreign currency").

    The exchange rate between the U.S. and foreign countries can be written as $/FC. That's the price (in dollars) for 1 unit of foreign currency.

    Now, since gold is easily transportable, it obeys the "law of one price". That is, the price in dollars is the same as the price in foreign currency, after currency translation:

    $/ounce of gold = $/FC x FC/ounce of gold.

    Stare at that equation for a minute. Any time you see the price of gold rise, one of two things must be true. Either the foreign price of gold (FC/ounce of gold) has increased, or the value of the dollar must have declined (i.e. foreign currencies have become more expensive, and $/FC has increased)."


  3. Turtle GG

    My head is spinning from attempting to figure out what the heck the author is talking about. I am a trader - as a trader I could personally care less about that sort of gobblygook. What I do is to look at the price of gold in various currency terms to see whether it is strong or weak. If it is strong and near record highs, that tells me that there is a reason for it to be strong. If it is strong, then it is not going to break substantially lower in US Dollar priced terms as long as this strength continues.

    Gold is a currency and needs to be treated as such. this author apparently does not view it as a currency. If a currency is strong (gold) on the European continent, it tells me that investors there do not trust their own currency and would rather own gold. In that sort of environment, US gold bears are not going to be successful at taking the price sharply lower no matter what the rest of the commodity complex might be doing.

    The problem with many analysts in the US is that they think the US is the center of the economic world and nothing exists outside of it. A buyer of gold in India or China or wherever could care less what the Dollar price of gold is or this guy's formula. The only thing they are concerned about is how much does that ounce of gold cost them in terms of their own native currency. If they are willing to pay record or near record prices for it, it tells me that the demand is very, very strong for the metal.

    That is all that I am interested in as a trader.

    Hope this makes sense to you.

  4. Dan, I know you are a trader and I have the highest respect for your market analysis and chart work, as I believe I've expressed on this blog since the day you started it. But, I think you may be are closing your eyes to something that is logical and correct.

    I am Australian. I am aware that the US is not the centre of the economic world. But I'm also aware that, for commodities such as gold, the USD pricing of them is the starting point for the pricing of them in all other currencies.

    AUDUSD is right now 1.0558.
    USD gold right now is 1,529.32

    Theoretical price of AUD gold:
    1,529.32/1.0558 = 1,448

    Actual market price of AUD gold right now: 1,448.

    This is not gobbledygook. Look at a monthly chart of USD gold since the start of 2009: 45% upward trend. Now look at monthly chart of AUDUSD over same period: 45 degrees upward trend. Combine the two and you get a flat AUD gold price (just look at the monthly AUD gold chart for the same period).

    So, in AUD terms gold has gone nowhere for 2 years, and gold bugs here are laughed at for that reason (unless such gold bugs carefully state that they are USD gold bugs, not AUD gold bugs).

    Similar logic applies to gold measured in other currencies.

    You said:
    "If a currency is strong (gold) on the European continent, it tells me that investors there do not trust their own currency and would rather own gold. In that sort of environment, US gold bears are not going to be successful at taking the price sharply lower no matter what the rest of the commodity complex might be doing."
    OK, next time USD gold falls by a 1% or 2%, let's check what happens to EUR gold. I hope that will resolve the issue for both of us.

  5. If the Law of One Price didn't apply, wouldn't that create an arbitrage situation?

  6. Dave T,
    yes, exactly. That's why the Law of One Price works. Because gold trades in spot FX markets (e.g. XAUUSD, XAUAUD, XAUEUR) the arbitraging away of any price differentials is constant and efficient.

  7. Turdle
    Sorry, but I think I gotta side with Dan on this one. Think of it in terms of pair trades. Long one thing vs short another. What Dan is saying is that lately, Long Gold/Short Euro is performing better than Long Gold/Short Dollar. And it is.

  8. This comment has been removed by the author.

  9. Eric1,
    OK, using the EUR price of gold (XAUEUR in the FX market) and the EURUSD exchange rate, please try and prove your point!

    (The FX pair XAUEUR is in fact the "pair trade" you speak of. It is long gold, short EUR. Similarly, XAUUSD is long gold, short USD.)

    The ONLY reason that XAUEUR is outperforming XAUUSD lately is because EURUSD is falling.

  10. Eric1,
    Just to be clear, you said:
    "What Dan is saying is that lately, Long Gold/Short Euro is performing better than Long Gold/Short Dollar. And it is."
    And I say the only reason for the outperformance is that EUR is falling against USD.

  11. "And I say the only reason for the outperformance is that EUR is falling against USD."

    Or, one could also say, simultaneously, that the EUR is falling against gold faster than the USD is falling against gold. They are both true. It doesn't have to be one or the other. It's all the same thing. It's all one big matrix.

    I think what we really have here is some miscommunication.

  12. 1. The speed of EUR's fall against gold is determined only by EUR's speed of fall against USD.

    2. The speed of USD's fall against gold is determined by how much loss of faith there is in the USD.

    If you'll concede those two points, then we are on the same page.

  13. If we take a look at Dan's Chart (by the way, thanks for your site and the great work you do!) and overlay the EUR/USD chart on top, I think it brings some thoughts to light. In Turd fashion, I did a quick crude overlay (ignore my slight scale issues)...


    To me, the chart shows that even when the Euro was gaining strength against the dollar... the price of gold was still moving up in real terms. In some respects, you might say that the price of gold has been almost inelastic and continued in its upward channel for over two years despite the EURO-FRN volatility.

  14. beprepared,

    OK, another chart for you to do (but it will take time!). For each candle on Dan's chart, multiply the closing price by the closing EURUSD rate on that date. Then join the dots. You will have created the USD gold chart. The point being that if you have a price of gold in any currency and you have the exchange rate of that currency vs USD, you can automatically determine the USD price of gold.

    I've now exhausted enough time on the topic, and have proven enough to myself. Apologies to Dan for clogging up his comments section.

  15. GG
    You are picturing a hierarchy. Gold->USD->EUR. The EUR being the tail being wagged by the other dogs. It's more of a political/economic paradigm than a mathematical one. If it works for you, fine.

    I picture more of a triangle with one of them on each corner. I'm not saying they are equal weight or anything. But they are interconnected. When one moves, the others move. It works for me.

    I guess maybe we won't get this resolved after all! G'night.

    boy, after spending a couple days on Turds new blog, it really feels funny going back to blogger. I don't like it now.

  16. GG
    After reading your 8:25 post, I'm not sure my 8:29 post makes any sense. But, I'm exhausted with it too. Mental circles. :)

  17. Good night. I actually prefer Blogger. More simple. All the action is in one place.

  18. Dear Turtle GG,

    You are watering a dead tree, and apologizing for your actions for altruistic reasons or are afraid of blowback?

    Brass-up and move on, you're beyond it.


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