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Gold Rose 14% in Euro and Yen Terms in 2014 – but Fell in U.S. Dollar Terms
Gold had a bad New Year’s Eve day, falling below $1200 to push gold into its second straight declining year, after 12 straight rising years (2001 to 2012). Ironically, December 31 marked the 40th anniversary of gold’s legalization in America at the end of 1974. Since then, gold has enjoyed two mega-bull markets, rising 8-fold from 1976 to 1980 and then rising over 7-fold from 2001 to 2011. Overall, in the 40 years since gold was legal for Americans to own, the price is up more than 6-fold in U.S. dollar terms.
But the untold story of gold in 2014 is how strongly it performed in terms of most other major currencies, due to the strong dollar. Most global commodities are universally priced in U.S. dollars, so a strong dollar will depress the international price, but local investors can still make a profit on gold in terms of their home currency – the only measuring stick that matters to real-life investors.
The global currency market is a $5.3 trillion-per-day market. Only three mega-currencies have enough “float” to fuel most of that global currency traffic – the U.S. dollar, the euro and the Japanese yen.
In 2014, the euro rose 14.07% to the U.S. dollar and the Japanese yen rose 14.34% to the U.S. dollar. That means that gold rose by about 14% in terms of the world’s #2 and #3 most popular currencies.
Specifically, gold closed 2013 in London at $1201.50, and it closed at 2014 at $1199.25, for a slim $2.25 (-0.2%) decline. That means gold rose by about 14% in terms of the other two major currencies in 2014:
The Price of an Ounce of Gold in 2014 in Three Leading Currencies
Put another way, gold was the second-best currency (to gold) in 2014, but the real story of 2014 was a tale of global fears and gold gains in the first half, followed by a dollar surge and oil drop in the second half.
Gold rose strongly in early 2014 in terms of the dollar, hitting $1385 on March 14, when Russia launched its annexation of Crimea – while threatening to take even more bites out of Ukraine. Gold remained over $1300 for most of June and July, but then the dollar began soaring, hurting nearly all commodities.
Oil fell by more than 50% from a high of $107 in late June to $52 by year’s end (This puts gold’s rather small decline in perspective.) Gold reached a London closing low of $1142 on November 5, but it rallied back over $1200 until the last trading day of the year, when it fell below the important $1200 benchmark.
Gold also enjoyed a relatively placid trading year – which is the best news that you can hope for in a declining market. There were no sharp down-drafts. On a closing basis, gold’s range was only $243 from high ($1385) to low ($1142), vs. a high-to-low spread of more than $500 ($1694 to $1192) in 2013.
Given the 50% drop in crude oil and iron ore, gold’s flat year makes her the belle of the commodity ball.
What’s Ahead for 2015? What do Gold’s Fundamentals Tell us?
Gold is a portfolio balancing mechanism in good times and bad. It serves a time-tested role as a portfolio stabilizer during sieges of deflation or inflation, or stock market crashes, or times of rising interest rates. Most gold investors think of their precious metals position as a form of insurance. Like most insurance policies, you don’t want to cash it in prematurely and thereby expose yourself to danger. Neither do you want gold to soar rapidly, since that usually reflects a world of rising dangers, inflation or escalating wars.
Here are four fundamentals that could help gold investors enjoy a better 2015 than 2013 or 2014:
#1: A Flat or Falling Dollar: The latest dollar surge is mostly based on the fact that the Federal Reserve stopped its quantitative easing (QE) in October, while the other two major central banks (the European Central Bank and the Bank of Japan) are continuing with their more radical forms of QE, thereby debasing their currencies at a faster rate than the Fed debased the dollar during its three rounds of QE.
In addition, the Federal Reserve keeps tantalizing investors with the hint that they will raise interest rates sometime in the middle of 2015. This draws more currency investors out of the euro zone (with its negative interest rates), in hopes of riding the tailwind of a stronger dollar in 2015. But what if the Fed keeps delaying rate increases, while Japan and Europe wind down their QE programs? That could cause a reversal in the currency trade winds, giving a boost to most commodities (including gold) in dollar terms.
#2: Asian and Russian Gold Buying. Central banks and private citizens are loading up in gold in Asia and Europe, where the price is rising in terms of their local currencies. Many central banks added to their gold holdings in 2014, most notably Russia, which added gold to its central coffers for eight months in a row (from April through November). Through November, they have purchased over 150 tons in 2014.
China and India account for over 50% of global demand. In November, the latest month available, gold sales in both countries soared. In India, the “80-20″ rule (in which gold importers had to export 20% of their imports, even after paying heavy import duties on their gold) was relaxed. Meanwhile, China’s gold imports through Hong Kong in November were the highest (99.1 tons) since last February, when demand was fueled by the Chinese New Year celebrations. Turkey, the world’s third largest gold buyer, also imported a record level of gold (47 tons) in November – a stunning 609% rise over the October and 127% over the same month in 2013. (Turkey exports gold to Iran, India, and other Middle East nations.)
#3: Lower Supplies due to Shrinking Mine Profits: The average “all in” cost to mine an ounce of gold these days is around $1168, which means that gold is unprofitable to mine in almost half of the leading deposits. Mines are closing operations right and left. Back when gold was trading at over $1500 per ounce, many miners began opening up extremely marginal mines, on the belief that gold would keep rising to $2000 and beyond. In the decade from 2001 to 2011 – when gold rose every year – the average gold content per ton of ore fell from 2.5 grams to under 1.7 grams. Since a metric ton, by definition, amounts to one million grams of ore, finding and isolating 1.7 parts per million of gold became a money-losing proposition for most miners, since 1.7 grams of gold is worth only $38 at $1200 per ounce gold.
When gold prices started falling in 2013, the supply of recycled scrap (some of it milked out of “Cash for Gold” mail-order or storefront operations) made up for the shortfall in newly-mined supply, but gold from recycling scrap fell to a 7-year low in 2014, meaning that the supply of available physical gold is likely to decline in 2015. With only a moderate increase in demand, gold prices could rise sharply this year.
#4: A Return of the Momentum Investors: Even though China, India and Turkey are the leading global markets for bullion demand, it’s no secret that the leveraged traders in New York are the “tail” that wags the golden dog. By using high leverage – usually via exchange-traded funds (ETFs) and futures contracts – these big investors can cause a rapid rise or fall in gold. That’s what happened over one long weekend in mid-April, 2013, when a concerted effort by the Big Boys sent gold down over $200 in four trading days – i.e., from $1580 to $1378. First, on Wednesday, April 12, Goldman Sachs counseled its clients to sell gold (or even sell short) when gold was trading at $1575. On Friday, investors took over $1 billion in gold out of the SPDR ETF, and then they sold another $188 million on Monday and $563 million on Tuesday, for $1.75 billion (1.25 million ounces at $1400 gold) of gold ETFs sold in three trading days.
Trend followers and leveraged investors can push gold up, too. When the first big U.S. gold ETF was launched in November 2004, it created a new and efficient way for paper-oriented traders to move in and out of gold without the nuisance of owning the physical metal and finding a place to store it safely. The price of gold soared from $430 in late 2004 to a peak of $1900 seven years later. Such a positive ride could happen again. If gold suddenly becomes “hot” in 2015 (due to the first three reasons listed above), then the momentum crowd could quickly jump on the gold bandwagon. When these investors buy the SPDR gold ETF (GLD), the ETF must then buy an equivalent amount of physical bullion to back up this demand, so ETF buying creates more demand, causing gold to rise, thereby attracting more gold buyers.
All of this adds up to a good time to buy and accumulate physical gold for portfolio balance and growth.