What the Aussie Dollar Reveals about Gold

What the Aussie Dollar Reveals about Gold

As I write this, the US dollar gold price is a few bucks under US$1,500.

Last week I mentioned that gold would fall into the US$1,500–20 range.

Well, it did, but then dived another 10 bucks or so lower as Trump and China pretended to reach a truce.

Don’t worry, the truce is temporary.

See, gold is up 25% in US dollar terms this year…

…so many have been wondering when the ‘steam’ will come out of this rally.

Let me tell you what I told Twitter last week. The recent gold price sell-off won’t matter a year from now.

In fact, let me tell you what happens next.

There’s an incredible pattern unravelling right now.

And you’re about to live through a historic moment in gold.

Market crashes reveal gold pattern

I’m not sure how old you are.

My guess is that you’ve seen a market crash or two during your adult life.

I was almost an adult when the Asian currency crisis took hold.

At the time though, I was deep into McDonald’s shifts and cramming for exams. Collapsing Asian currencies weren’t my issue. Bottom-dollar hourly wages and good grades were my only concerns.

The dotcom crash, however, is still a vivid memory.

And it was the first market crash I paid close attention to.

The unravelling of the tech bubble nearly crippled my parents’ budding tech company.

International stock markets suddenly captured my attention the way a shoe sale used to.

So, it should come as no surprise that by the time the subprime mortgage crisis rolled in, I was working in the markets.

I wasn’t a bystander anymore.

The subprime mortgage crisis took 18 months to really unravel.

The entire time, I watched global markets tumble. I took calls with customers. I tried to decipher daily movements. I analysed vast amounts of information.

What all these crashes have in common, though, isn’t the havoc they wreaked on the stock markets and major economies.

It’s that through every crash, every major index tumble, I watched the price of gold.

Through observing these three distinct periods is how I developed my ‘gold windows’ theory.

The gold windows

My gold windows theory isn’t some complex mathematical idea.

Nope. It’s incredibly simple.

The idea is that a gold bull market moves in three distinct stages: currency devaluation, investor phase and then mania.

However, in each of these phases, there are smaller steps along the way.

And these smaller steps help you identify where the gold price is in each phase.

For example, as I tell my subscribers over at Hard Money Trader, I believe we are firmly in the investor phase of the gold windows.

This was confirmed for me when gold traded down to around US$1,180 last year.

That point was a 10% price fall from the May high. A 10% price correction in the investor phase is something gold did in both the 1970s and 2000s gold bull markets.

Basically, the price of gold trades down to a new ‘high low’ in US dollars, which later turns out to be a price that gold will never trade at again.

This happened last year. The days of buying gold under US$1,200 per ounce are gone.

So are the days of buying gold under US$1,300. Perhaps even US$1,400…

Does that mean the gold mania phase is next? Is the price of gold about to go parabolic?

Not exactly. However, the new ‘floor’ for the gold price does suggest the mania phase might not be as far away as I first thought.

But, before we get to the final phase of the gold windows…one more pattern needs to reveal itself.

And that showed up in the final days of 2018…

Currencies predict a gold rally

Believe it or not, the next clue to what’s happening for gold comes not from the gold market…but currencies.

Not gold in terms of US dollars…

…but the value of gold in Turkish lira, Russian ruble, Indian rupiah, South African rand, Brazilian real and the Mexican peso.

All of these emerging market currencies have all-time highs when compared to gold.

Sure, neither Russia nor Turkey is known for currency or political stability.

Yet both of those currencies reflect a change in perception. Investors aren’t fleeing into more stable currencies like the euro or US dollar. Rather, they are moving into hard money such as gold.

It’s a similar story for Brazil and South Africa.

Remember, these are gold-producing countries.

But those are just emerging markets, right?

Emerging markets traditionally have weak currencies, so all-time highs in their gold price shouldn’t be a surprise.

Well…what about Australia or Canada?

Both are major, developed gold-mining economies.

At least, that’s where the all-time highs in local currencies started.

In March this year, the price of gold in Aussie dollars reached an all-time high of $1,888.

Six months later the Aussie new gold price has gone on to make almost a new high each month. Trading as high as AU$2,300 per ounce two weeks ago.

Here’s the thing.

Australia isn’t the only developed economy to see their currency hit an all-time high in the gold price.

Back in June, the Canadian loonie (dollar) finally pushed above CA$1,848 for the first time ever…and a short few months later is now CA$1,977 per ounce of gold.

A month after that came the Japanese yen. That’s right. A stable, perceived safe haven currency hit an all-new high in the gold price in August.

My point is it’s no longer just emerging market currencies wreaking havoc against gold. Major developed economies are falling in value too.

This isn’t a once-off.

This pattern revealed itself in the 2000s gold bull market. And it’s the crucial, final stage in the ‘investor phase’ of the gold window.

Remember, this currency weakness happened before we knew a financial crisis was going to land at our feet.

Gold is doing exactly what it should be.

Alerting us to stress in the financial system.

Six months ago it was showing up in emerging markets and commodity-producing nations.

Ignore this dip.

The gold price rally is just beginning.

And it’s giving you clues as to what’s about to happen next.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia