by David Brady, Sprott Money:
Just as Neo flexed his muscles upon learning he is “The One” and took out Agent Smith at the finale of The Matrix , Gold is now letting fiat currencies know who is really in charge.
Many take credit for anticipating Gold’s ascent from the lows in August, and yet they cite all of the wrong reasons for its appreciation: peak DXY, peak USD/JPY, falling real yields, speculative buying, and so on. The truth is that Gold is doing its own thing and taking matters into its own hands. We know this because Gold isn’t just rising against the dollar or the euro or the yuan, it is soaring against ALL major currencies.
Gold has risen significantly against them all by over 10% on average. Its gains are not solely against the dollar or yuan due to U.S.- or China-specific policies, but against ALL of them. What is the common denominator here? Gold.
Retrospection can be extremely informative in terms of where we’re headed next. Most of my readers are familiar with this equation:
XAU/USD = XAU/CNY divided by USD/CNY
When XAU/CNY was relatively fixed within a range, Gold in dollar terms was almost perfectly correlated to USD/CNY on an inverse basis. This is what happens when one variable in an equation is fixed. Then something strange happened on August 16 th. XAU/CNY bottomed at 8084 and proceeded to rise from that point forward. At the same time, USD/CNY became fixed in a range of 6.78-6.98, as a stalemate developed in the trade war between the U.S. and China. This meant that XAU/CNY and XAU/USD became directly correlated. It was no coincidence that both bottomed out the same day.
Then on October 11th, the following occurred:
Optimism that the trade war between the U.S.and China could be resolved sent Gold soaring through its 200-day moving average against the yuan. The huge white candle in the XAU/CNY that day suggested the low was in. This was followed by a successful backtest on November 12 and 13 that appeared to confirm the low was in, and it hasn’t looked back since. Gold in dollar terms lagged the move in XAU/CNY, but given the new direct correlation, it, too, just went higher.
But Gold isn’t just rising against the yuan, it is rising against all the major currencies. Gold is the common denominator in all cases, which makes it clear that Gold is driving the bus now. Why would Gold rise against all fiat currencies? Since October, it has become clear that the global stock markets cannot rise without increasing liquidity and that economic activity is deteriorating worldwide. The market is anticipating that the central banks will be forced to turn on the monetary spigots again—print currency—to prevent a total collapse of the markets and the monetary system itself. Gold soars in such an environment.
Regardless of what the cause is, Gold is asserting its status as the supreme money in a fiat currency system, which is a significantly positive development and may signal the end of the paper markets’ control of precious metals’ pricing. If so, the sky is the limit.