Symmetrically, a decline of the AUD/USD makes gold more expensive for them. This foreign currency (FX) effect (also known by traders as currency risk) is a real matter for local investors.

FX markets in general and the Australian Dollar in particular had impressive volatility in 2008, especially during the second half of the year. If it continues in 2009, you'll want to understand the relationship in order to devise your own gold strategy.

On the chart above, the black line represents gold in Australian dollars (we called this composite "Aussie gold"), while the green bars represent the currency pair AUD/USD. There are three different phases that are distinct.

1) Phase 1 from August 2007 to March 2008 where "Aussie Gold" climbed sharply despite the fact that the AUD/USD exchange rate was rising too. It means that at the same time, gold prices in USD were rising faster than the AUD/USD.
In details, it means that, the AUD/USD ( how many US Dollars for ONE Australian Dollar) rose by 11% roughly between September 2007 and March 2008. For the same period, gold (therefore how many US Dollars for ONE ounce of Gold) rose by 31%
As a result, both the AUD and gold appreciated against the USD, but gold appreciated much faster. That's why the Aussie gold price (how many Australian Dollars for ONE ounce of gold) also climbed sharply. What does it all mean? It means that gold appreciated against AUD!
The Aussie gold price is a function of the velocity of the AUD/USD compared to the velocity of gold. If AUD/USD appreciates faster than gold, then the Aussie gold price declines. If gold appreciates faster than AUD/USD, then the Aussie gold price rises.

2) Phase 2 from March 2008 to September 2008 where the "Aussie gold" was cheaper as gold in USD was correcting while the local currency jumped to historical highs until July, then crashed.

3) Phase 3 from September until now where gold prices on the international markets are consolidating and rising again whereas the AUD/USD has been falling to low levels not seen since 2003. As a result, the "Aussie gold" is soaring.

Since last October, we can see that the Aussie gold price is reaching historic highs. Because of the crash of his currency on the FX markets, a local must pay today $1,250 AUD to buy an ounce of gold. At mid-August last year, the cost for the same ounce was only $917 AUD. It's a 36% increase in 5 months!

What is the conclusion of that?

Well, we have calculated the correlation between gold and the Australian currency, both the strength of their relationship and the degree of their relationship. From 1991 to date, this correlation is equal to 81%. Gold and the Aussie are positively correlated, as they typically move in the same direction because they are both traded against the US Dollar. But they don't move at the same pace. And this is that difference of pace or velocity that drives the Aussie gold price.

On a historical basis, a strong Australian dollar is NOT a 100% guarantee of a cheaper gold for local investors, but it is clearly often the case.

That's why if you want to buy gold, I would suggest you to wait for the Aussie gold price to correct. Currently these are the historical highs. If we have a look at the Aussie gold itself on a weekly chart (above), the MACD shows that the bullish momentum is likely to be over. It has peaked at unprecedented high levels on early January and has already started to curve downward.

Historically a similar configuration happened twice, in May 2006 and March 2008 (circled on the chart). If the MACD crosses below its signal line, it would be a clear signal of trend reversal, and would drive the Aussie Gold much cheaper. We will keep an eye on that in the coming weeks!

Gabriel Andre
for The Daily Reckoning Australia

• Prices of Gold in the Top 10 World Currencies
• The Aussie Dollar as a Measure of Global Risk Appetite
• September is the Best Month for Gold
• Aussie Dollar Ready to Storm Past US Dollar
• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy

The First World War: 1914-1918. The First World Depression: 2009-??

"This is going to be even worse that I thought," said our old friend, Doug Casey.

He was referring to what will most likely become the world's first global depression.

"What happened while we were away?" was the question we had asked.

We just got back from our trip out to the ranch. What do we find? More of the same:

The Dow fell another 312 points on Friday. The index now stands at 8379. This morning, stocks are falling again in Asia.

In Japan, the Nikkei index finished down 6.4% - its worst closing level since October 1982. Shares in Hong Kong didn't fare any better; with the Hang Seng index falling 12.7%.

And at the open this morning, the Dow is down over 150 points, as confidence in the U.S. government to help quell this global depression is further shaken.

'Dow 5,000' is our prediction. Not that we have any inside information. But when we look at a long-term chart of the Dow, we notice that it goes up and down. It tends to go way down after it has been way up - in long, 15-20 year waves. The top of this wave washed over us in January 2000. Since then, the index has been higher...but not when you adjust it for inflation.

It probably would have corrected to the 5,000-range already. But the feds intervened. And now we've really got trouble. Because in trying to head off a recession/bear market, the authorities provoked a housing bubble, a financial bubble, and a worldwide credit bubble. Homeowners over-bought. Banks over-lent. Consumers over-stretched. Almost everyone seemed to over-do it. So, what might have been a typical bear market has been transformed into a monster of deleveraging.

The planet's financial press is beginning to see things our way. "In the first place, the U.S. federal reserve applied a very expansive monetary policy." This is a quote from La Prensa in Buenos Aires. The article goes on to explain that a combination of fiscal and monetary stimulus in the early 2000s produced a huge party in the financial sector, with most of the liquor coming from residential mortgages. Banks all over the world got in the bubbly spirit. Too bad. Now, they're all reporting in sick and calling the doctor.

The paper does not point it out; so we will: The world's worst headaches will be felt by America's baby boomers.

"I don't know what they're going to do," said another friend over the weekend. "I know I'm in good shape. I've saved a lot of cash. I began reading The Daily Reckoning about two years ago...and actually started following your advice. I sold almost all my stocks. I'm in cash in and gold. I don't even have a mortgage.

"So I don't have too to worry about. But I'm worried anyway. I don't know...maybe it's just catchy. I'm cutting back as much as I can. For example, I was going to buy a new car. I went in the showroom and picked one out and everything. But I think I'm going to cancel the order. Well, the salesman's not going to get his commission. And I'm going to start doing my own yard work. It's silly in a way. Because I don't have to. But it makes me nervous to spend the money. Which means, there's some minimum-wage guy who's wages are about to become even more minimal. And I figure that if I'm thinking that way, there must be millions of other baby boomers in worse shape than I am and they're probably cutting back as fast as they can. Businesses have got to be cutting back too. And when employers look for fat to cut, they're bound to find the baby boomers. And then what do these people do? They don't have savings. And they're not likely to get another job...not in a major downturn. It could be pretty grim all around."

The latest report says unemployment in Rhode Island has topped 9% - the highest rate in the nation.

"But this has barely begun," continued Doug. "The real cuts only began a few weeks ago. They don't show up in the figures yet. All this takes time. First, it was only the bankers who were panicking. Then, it was investors. Now, it's businessmen. And soon, it will be consumers. This kind of crisis runs downhill."

Investors had plenty of reason to panic. This month alone, stocks worldwide lost $10 trillion. The world stock index is down 48% so far for the year.

Businessmen have reason to panic too. They'll have a hard time raising money in this market. So, they have to cut new projects and old employees.

The next stage will come when consumers go on a rampage of thrift. Credit cards will go in the trash. Malls will be silent. Sales clerks will fall asleep on the job - and then be fired. Higher unemployment. More foreclosures. More bankruptcies.

And when Americans don't shop, it will be products Made in China that they aren't shopping for. That's why the depression will be worldwide - the first ever.

"China, India, Brazil and Russia (the BRICs), the biggest emerging economies, export most of their products either to each other...or to the developed economies [mainly, the USA]," continues La Prensa.

Yes, dear reader...our "Crash Alert" flag is still up-even though the stock market, the housing market, the financial market, and the commodities market have already crashed. But now, there's another flag up on our mast, a black flag. On it is a white duck laying on its back with its feet up in the air.

It is our way of warning you: "Global Depression Alert" it says at the bottom.

*** Asked about the commodities market, our old friend Rick Rule had this comment:

"There's going to be a very interesting tug-of-war. On the lower side will be, I think, rapidly declining developed-nations demand. Meaning recession in the United States and Western Europe. And on the other side is going to be, I think, steadier emerging-market demand than many people think. Simply because the developing countries' balance sheets are better than we are accustomed to.

"I think the very sharp moves down in commodity prices are over. I think that those sharp moves down were not a reflection of fabrication in consumer markets. But rather, [they were] a function of financial players that were involved in the new carry trade involving low U.S. dollar interest rates where people were going long commodity, short the U.S. dollar; a trade that worked for a year and unwound very, very, very aggressively. So I think the sharp down move that we've been through is in some part over. I think it's likely to be replaced in the base metals by a grinding move lower. It probably will not be particularly deep but maybe four to six months longer in duration."

(Look for more comments from Rick in our upcoming report on the crisis and how to survive it...coming soon...promise!)

*** "It's better not to watch," said a friend over dinner.

We've been out of touch with the financial world for a couple days. Up at the ranch in Argentina, we have neither phone, nor TV, nor Internet.

"You're better off not paying any attention to it anyway," continued our companion. "All markets go to extremes. And then, when they get to their extreme position, everyone tells you that 'this market won't go down.' And they always have a lot of reasons why they won't go down. As soon as you hear people explaining why this market is different, it's time to get out.

"But the trouble is, even if you know it's a lot of nonsense...and even if you know prices WILL go down... all those people with all their stupid 'reasons' have an effect on you. You may think it is crazy...but you begin to think that there are so many crazy people out there...maybe it will go on forever. And so you don't get out when you should. You say to yourself: 'well, only a fool would buy at these prices...but there are a lot of fools around... I'm going to sell...but not quite yet.'

"That's why it's better to cut yourself off. Just look at the facts yourself. And if you think it is crazy, it probably is crazy. And you should get out, now. What was it that J.P. Morgan said? 'I've made a fortune by selling too soon.'

Dear readers are warned:

First, we don't know any better than anyone else how this bear market will play itself out.

Second, it is quite likely that there will be a biggish rally that will convince people that the whole thing will blow over. We hope there is a biggish rally; we intend to use it to sell out of stocks completely (a confession: we're better at giving advice than taking it - even our own advice.)

And third, Warren Buffett is no fool; if he says you should buy stocks, you should at least listen.

Listen politely...but get out of the stock market anyway.

*** We come to Argentina partly to check on our cabbages...and partly to get a look at the future. Bankruptcy. Default. Hyper-inflation. As our dear reader commented earlier in the week, the average Argentine cab driver knows more about financial crises than the heads of the U.S. Federal Reserve and Treasury Department combined.

What have we learned? More tomorrow...

Bill Bonner
for The Daily Reckoning Australia

• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth
• Capitalism Has to Do its Work
• The US Dollar Showing Signs of Life
• Bailout Rejected by the House
• The Day of Reckoning is Upon Us