Currencies are vulnerable, but Gold is valuable

JOHANNESBURG (Business Day) -- A swinging oil price together with currency vulnerability equals a surge in the gold price. Depending on the direction of the economic air currents, currencies float against each other, which is why many wise investors are exchanging fiat money (banknotes, etc.) for gold.

As gold is bought and sold in dollars, the gold price rises when the dollar and currencies linked to it lose ground. Gold's present longer-term climb began in August 1999 when it stood at $253. It has since put on 211%. From August 1999 to November 2005, the gold price rose 79%. The channel was then broken and a new channel formed. From November 2005 to date, the gold price rose 70%. The latest short-term rise from its August low is 31%. A strong buy signal, when the moving average convergence/divergence plotting crossed its own moving average, came in September.

If gold keeps rising at its present rate, its price could reach $1,100 before the end of next year. At the current rate, by year-end the equilibrium will be $900 and the support $750.

Gold is only slightly higher than its equilibrium and so not currently overbought. There are several counts well into the $800s but the latest count is to $1,104.

As currencies prove vulnerable, calls have been made for an intrinsic commodity, for example gold, against which currencies are valued, rather than each other. But gold was linked to U.S. dollars between 1946 and 1971 when the gold standard was reintroduced with The Bretton Woods System. It pegged gold at $35/oz. Former U.S. president Richard Nixon released it, but then the price remained below $100/oz until 1973. Rising to a high of $184 in 1974, it flopped back to $110 in August 1976, when the massive 673% climb to its record $850 in January 1980 began. As the 87% surge took place over the holiday season, many investors were caught napping.

Former U.S. Federal Reserve chairman Alan Greenspan said that "under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth".

Abandoning the gold standard made it possible for welfare statists to use the banking system "as a means of unlimited expansion of credit". Without the gold standard, there is no way to protect savings from inflation.

With gold flirting above $800/oz and the dollar still looking frail, despite the latest rate cut, it seems Greenspan hit the nail on the head. The nearest currency measuring tool (purchasing power parity) we have today that could vaguely be called a standard is The Economist's Big Mac rating, which compares prices of Big Macs in various countries. But as food prices are spiralling around the world, and while U.S., asset prices (houses) are deflating, Big Mac is a poor currency measuring tool.

The rand gold price reached a record high last month, but the strengthening of the rand pushed it lower. While no sell signal has materialised, it looks vulnerable in the short term, but longer term has a count to R6,563. Newgold is at a triple top, which if broken, will give a count to R7,078.

The gold share index is fast heading for an oversold position, and its Cycle Trends future plotting points further down in the short term, but after setting for a while at a cycle bottom it is likely to head strongly upwards.

Among mining shares, Witsgold [JSE:WGR] has fulfilled all three of its down-counts, and is now heading better. While Witsgold's plotting suggests a further rise, volumes appear too low to keep momentum. Recovering Wesizwe [JSE:WEZ] is trying to confirm a new bull trend, and if its reaches R10 we can make a count to R12.30. Urone is signalling a recovery and has pushed up through its stochastic moving average but volume confirmation is needed.