I'm in Lithuania this week, doing my annual teaching gig, helping young people overcome the deficiencies in their normal education and learn about economics and entrepreneurship in the real world. I'm overcome again with the difficulty of putting the magic of this event into words. Most of the students are repeat customers and have now graduated from college and are working or, I'm proud to say, starting businesses of their own. I love this!
Happily, it's the 21st century and the Internet here in the Lithuanian countryside is stable, so I can keep up with the markets and our investments. On that subject, Vedran Vuk, who helps David Galland with "The Room" edition of this daily letter, has an article precious metals investors would do well to read, in view of continuing weakness in the euro making the dollar look strong.
I strongly urge readers to give this careful thought and not let themselves get stampeded by people who sell gold for the wrong reasons.
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||42.86||46.45||59.20|
|Gold Junior Stocks (GDXJ)||19.47||20.10||37.19|
|Silver Stocks (SIL)||18.33||18.50||27.33|
|TSX (Toronto Stock Exchange)||11,506.50||11,848.75||12,816.03|
By Vedran Vuk, Casey Research
You've probably heard that a strong dollar means weaker gold prices.
Yet anyone who has been watching the markets closely knows that "strong dollar = weak gold" isn't exactly true.
Sometimes, when the dollar strengthens, gold will fall. Other times it will stay flat or can even rise.
So where does that uncertainty leave gold investors?
We really need to understand the gold-dollar relationship in precise terms, not general ones.
One thing that you can do is look at a chart of gold and the USD/EUR over the past six months, starting from the February 1 price of $1,749.50:
(Click on image to enlarge)
It clearly shows that gold has been going down as the dollar has been gaining against its primary competitor, the euro.
In fact, the percentage gain for the dollar is nearly the same as the decline in gold, just under 10%. Seems like an almost perfect inverse correlation, right?
No, not exactly. Look closer.
There are a lot bumps and anomalies along the way. Sometimes gold has a mind of its own, separate from the dollar, meaning that other factors must be driving it.
To find out more, we also calculated the correlation of returns on gold and the USD/EUR currency pair.
For a quick refresher on definitions:
So what's gold's correlation with the USD/EUR currency pair over the past six months? It is -0.471.
To make sure this wasn't a euro-only phenomenon, we also checked the correlation of gold to the US dollar Major Currency Index, which reflects the strength of the dollar relative to the currencies of the Eurozone, Canada, Japan, the United Kingdom, Switzerland, Sweden, and Australia.
Once again, the correlation was far weaker than one might expect, at -0.531.
If you're expecting more flights to safety boosting the dollar, then these correlations are definitely something to think about. At the same time, the correlations are not that strong.
Many gold investors falsely believe that a stronger dollar will simply run gold into the ground. Yes, a strong dollar would present challenges, but we need to also remember that we're not talking about a correlation of -1.
Bottom line… the dollar influences gold prices, but it is not the sole determinant of its value.
Another factor for gold investors to consider is that the relationship between these variables can change over time. -0.471 is not set in stone – the correlation can get stronger or weaker from there.
In fact, over the past five years, the correlation has typically been weaker.
(Click on image to enlarge)
It's hard to believe, but in the six-month period preceding September 21, 2010, gold hit a peak positive correlation to USD/EUR of +0.149. On the other end of the spectrum, gold had its most negative correlation of -0.741 in the six-month period prior to September 12, 2008. From these two points, gold has been everywhere in between.
If we enter a period of an even stronger dollar, gold investors might be concerned, but nonetheless, as the data show, gold and the UD dollar are not the perfect inverse of each other.
Even if the correlation were to become as negative as -0.741 again, a rising dollar wouldn't necessarily crush the gold price.
Furthermore, there's also the possibility of gold becoming less negatively correlated to the dollar. Even without the statistics, this is apparent. After all, the dollar has already strengthened, and gold is still holding up well. Has it been roaring to new heights as it did in years past? Not lately; but it hasn't been beaten into the ground either – and there's a lot more of the gold story yet to play out.
Vedran Vuk is a senior analyst at Casey Research, publishers of 10 research services read by over 175,000 independent-minded investors around the world. The August issue of BIG GOLD, due out Tuesday afternoon, outlines a new trend in gold that most analysts haven't picked up on yet – and more importantly, an actionable solution. Now is the time to buy gold and gold stocks while prices are down.
Global Gold Mines and Deposits Ranking, 2012 (Visual Capitalist)
This infographic is based on Natural Resource Holdings' report which ranks gold mines and deposits by size and grade. It has information on which countries host more million-ounce gold deposits than others and where the largest gold deposits are located.
The researchers identified 439 gold deposits that host over 1,000,000 ounces of gold. Among them, 189 producing mines belong to companies with an average market capitalization of US$1.8 billion, while the majority of the 250 undeveloped deposits are owned by independent junior companies, private companies, or government-sponsored enterprises.
Their data reiterate that both large and high-grade gold deposits are rare beasts. However, many of the known undeveloped deposits won't be exploitable for many years because of financing difficulties, location challenges, political risk, etc. Another important factor that will impact future gold supply is noticeably lower grades in undeveloped deposits, which will require more energy and capital expenditure to put into production.
South Korea's central bank bought 16 tonnes (0.5 million ounces) of gold in July as part of its effort to diversify its massive foreign exchange reserves. After the purchase, worth US$810 million, the country's gold holdings now total 70.4 tonnes (2.3 million ounces). Reuters reports that the country's gold reserves have grown fivefold in the last 13 months, when South Korea started increasing its reserves after leaving them unchanged for more than a decade.
After becoming net purchasers in 2010, central banks have bought record amounts of gold – more than 450 tonnes (14.5 million ounces) in 2011. Analysts expect this trend to continue, supported by global economic uncertainty.