Gold & Silver
James Moreau
Gold
and the US $ appear to be opposite sides of the same coin. A
brief look at the chart of Gold and the US $ (monthly closes
over the past 9 years) makes it clear that Gold rises when the
Dollar falls, and Gold drops when the Dollar rises.
That leads to
the conclusion that Gold and the $ are little more than two different ways
to make the same wager. Since Gold is priced in US $, a change in the exchange
rate of the $ seems to be directly reflected in a corresponding but opposite
change in the price of Gold.
However, the simplicity of equating the price of Gold with the opposite
of the $ exchange rate masks an important question. What is happening
to the value
of Gold as measured in all paper currencies? This is an essential focal point
for investors who must first decide what proportion of their resources to
allocate to hard assets like Gold, with the remainder of their assets
used to continue
pursuit of traditional investments which all revolve around paper.
When the US $ drops and the price of Gold (measured in dollars) increases,
is that change in the price of Gold due more to Gold rising, or to the dollar
falling? The MoreAU index was created to answer that question. The MoreAU
index is calculated by multiplying the closing price of Gold (in US
$'s) times the
closing price of the US $ (USDX trade weighted) and dividing by 1,000. Although
it may not be obvious that multiplying the price of Gold times the US $ produces
a result with meaning, it can be clearly demonstrated that the MoreAU index
is as valuable to use as it is simple to calculate. For example, if the price
of Gold increases (or decreases) by 20% from the previous month, but the
US $ drops (or rises) by 20%, the MoreAU index will be unchanged. A
flat MoreAU
index shows that the change in the price of Gold is directly attributed to
the change in the US $. Conversely, a rising MoreAU index reflects relative
strength in Gold compared to the $, and a falling MoreAU index shows relative
weakness in Gold compared to the $. Since the USDX trade weighted dollar
is a comparison to other major international currencies, the MoreAU
index filters
out changes caused by the dollar and shows the change of the cost of Gold
against all paper currency.
The
chart above shows the MoreAU index for monthly closes over the
past 9 years. As the $ increased in value from 1995 through 1999,
the
price of Gold
fell faster than the dollar rose and the MoreAU index shows
that
Gold was weaker than the international currencies. After
bottoming in mid
1999, however, the value of Gold began a strong appreciation
against not just the $, but against all paper in the form of international
currencies.
The rise in the value of Gold has formed a clear bullish channel
which continues to signal that the value of Gold projects future
gains which
are independent
of the trade weighted US $. Until the MoreAU index begins to fall down
out of the bullish channel, investors can expect to be richly rewarded
with a
buy and hold approach to Gold.
A
similar technique can be used to calculate a MoreAG index (Silver
* US$) to filter
out changes in the dollar exchange rate and to show how
Silver is performing
relative to all paper currencies. The chart above shows
the MoreAG index for monthly closes over the past 9 years.
From 1995 to
May 2003,
Silver had high volatility, but there was little trend
in the MoreAG index. As the Optimist, however, I focus on the fast
rising uptrend
line since early 2003. Until the MoreAG index decisively
falls through that
uptrend line, I see Silver rapidly gaining strength in
comparison to the US $.
To
be continued and updated. . . .
Jim
James
Moreau
email: Optmst@Gmail.Com
website: The Optimist |
