Dollar Loss and Gold Gain
Needs to be Addressed by Every Investor in Gold
No Matter What the Currency Unit of Your Domicile
By
James Sinclair, Chairman
TNX on the TSE
 

Dear Jim:
I just thought this was an interesting subject, since that is currently the way my position feels. I'm a European investor trying to 'ride the gold bull'. Now how do I ride the gold bull? I do like most other gold bugs; I invest in mining stocks. But gosh darn, how do I do that? Well I get an account on Ameritrade, E-Trade or whatnot, and buy as much mining stock as I have money to. I do it because gold is going to-da-moon, right?

The only problem is I live in Euroland. And my mining stocks are in the US, invested in the U$ bear-market dollar. Until the end of last year this setup worked pretty well, but since the USD started it's decline it's been like threading water. Gold goes up, USD goes down, mining stocks yawn a bit and perhaps even advance, if they're having a good day.

But my portfolio is now in USD. It's a pain in the butt. What I really should do, of course, is to take delivery of physical gold. But it's not that easy over here. I think this is a situation most European gold bugs small investors are in.

I really don't have anything else to say..just wanted to give you this 'anecdote', or perhaps something to think about..if it really matters :) (and also to see if you have anything clever to say about this (my) situation :)).

Regards,
"Ghost"

Dear Ghost:

Re: Dollar loss and gold gain natural to any gold investment.

It matters, significantly, to both US as well Euro investors. Your problem is also a problem of US investors with the only one exception. The problem is caused all investors in gold by a weak dollar reducing the gold profit and it is totally apparent to you. However, this loss of profit is hidden from the view of the US investor as that person both buys and sells in dollars with no other currency exchange. You enter and exit the Euro, so you wonder where did my gold profit go? The US investor does not see the loss but loses equally. Yes, the US gold community is almost to a person ignorant that their investment in gold must, to profit completely, be a two-sided transaction. One side of the investment is the gold and/or gold share investment, long. The other side of investment must represents some form of a short position in the dollar. Unless this is done, in the long run, you are spinning your wheels and going maybe slightly somewhere at the best.

So to opine on the question you ask, your problem is not unique. Truth be told, even those living in the US are dollar bound in the same dollar bear market. They have a problem as serious as yours but cannot see it as clearly.

First, lets start with some explanations. You need to look at gold as a currency because that is the role it plays in a gold bull market. The role it plays in a gold bear market is that of a commodity. It moves between these two definitions until remonetization but that is another entirely different editorial. * see " The Federal Reserve Gold Certificate Ratio aka The gold cover Clause."

When gold appreciates faster than the fastest appreciating currency, then all currencies are declining in terms of gold. That time will come, be assured of that.

There is a means of defense available for the situation that now challenges both the US and well as European investors in gold. It is simple. The Euro based investor can lose a significant amount of the profit with appreciating Euros versus the US dollar in the gold market. That is because gold is traded in dollars, period. When it appears to be traded in other currencies that is only an appearance as the major market for gold is dollar, period. So do not waste you time saying, "but." For instance, if the gold price rises from US dollar $300 as it has and goes to US dollar $400 as it is about to, and if the Euro rises 30% from the time of the purchase of gold, the Euro based investor has lost 5% on the investment. The US investor feels good because that investor has gained 25%, but compared to the Euro he has lost as well. The only difference is that the Euro based investor knows it and the US investor does not.

The simple solution is for the investor in gold to hold Euros equal to, but not exceeding, the value of their gold investment thereby making both the gold profit as well as Euro profit. There also is the rub if you do not have the facilities of a full service international bank. That does not mean 25% in gold plus 30% in the Euro but in the profit in gold and actually staying even in the currency differential. I know this is hard concept to understand but trust me, it can work.

To do this you will need an international bank account or a commodity account. Do not be scared of the word "commodity." It need not be a dangerous place to be. What makes commodities dangerous is the commodity investor who uses too much credit. Let’s work together now to set up the strategy for the US investor without an international bank and the Euro investor with or without an international full service bank.

US investor: For the US investor it is more difficult to recognize that your gold investment, when the dollar is declining, is losing the percentage depreciation of the dollar versus the stronger currencies. This is because you pay dollars to buy the gold or gold shares and upon the sale you are paid dollars. There is no currency exchange taking place between your currency of domicile and the currency of gold. However, this year, the Euro has risen from .88 to $1.00 to 1.09 to $1.00. That is .21 over .88 or 24% rounded to the nearest tenth. Gold in the exact same period has risen from $291 to $371.50. That is 80.6 over 291 or 28% rounded to the nearest tenth. So for the US investor, he has made 28% and against the Euro lost 24% or basically spinning his/her tires and gone almost nowhere except backwards as have all the non-gold investors.

The solution, which can and should be done, even now, is to purchase Euros equal to the value of the investment in gold and/or gold shares. The caveat is that you should not gamble but rather just hedge here. The hedging you are going to do is in listed Euro first derivatives which are called futures. The hedge is long gold and long the Euro in order to gain in the Euro equal to the depreciation in the US dollar. This way you world have made in dollars the 28% profit in gold and also made in Euro futures paid in dollars equal to the depreciation of the dollar 24%. This way you are the recipient of both profits which means, in terms of a constant dollar from the time of your buy until your sell, you have made and keep the full profit in gold. Ok, that is not your basic one plus one equals two but it is correct.

Simply stated, for the US investor without an international full service bank, you buy Euro futures equal to, but not exceeding, the cash value of your gold investment. Problem solved. The rub in all this however is the size of the available Euro future in the USA, which excludes the modest investor in gold.

The risk is that both the Euro and gold decline together which would be the usual relationship and you will have a loss on both. But then what is without risk. The contract will be defined at the conclusion of this article

I will adjust your strategy at Euro $1.23 to $1.25 where the appreciation on the following leg in gold may well exceed all currencies. This will more than likely occur between Wave two and Wave three of the long-term gold bull market we are in. My intention is, to the best of my ability, will be to direct you on that transition.

For the European Gold investor: You have no problem seeing the effect of your gold investment of the Euro appreciation against US dollar. When you make your sale what comes back to you in Euro is clear and disappointing.

Your fix is the same as the US investor but your option as to size of the effect dollar short, your Euro long, it totally adjustable to the size of your investment position. You can set the entire transaction up with your full service international bank who will generally be able to give you a package from inter-bank forward Euro to match the amount of your gold and/or gold share investment and you are free from the commodity form of trading the Euro.

If you do not have such a facility then your should find a brokerage house that both services the commodity as well as the stock trader. Your strategy then would be exactly the same as that of the US investor lacking an international full service bank facility.
Therefore, the strategy is to buy Euros equal to their gold and/or gold share investment.

It is that simple in terms of instruction to be given to your broker. In the US, your broker will generally go into freeze frame as his/her eye glaze over. The cure to that is to deal with a firm that offers both commodity and security facilities. For those investors anywhere, for example those dealing with a Swiss Bank, it is simply a normal day-to-day transaction for investors. You are doing what is called covering your currency risk in the transaction.

If you want to professionalize yourself, this is your opportunity. I always do my gold investment covering my currency risks. If you want to do likewise but have run into the major world conspiracy, stupidity, then email or fax me your question. I may answer in article form but the questions you send me focus my selection of article topics as well as direct answers.