A look at the real value of gold on an historical basis.

I like making random gold ratio charts in stockcharts.com since it lets you chart the ratio of anything: gold:oil, gold:copper, gold:SPX, etc:

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If you do this kind of analysis on a longer-term basis, you see that gold is getting a bit expensive relative to other commodities, capital goods or labor (or you could say that each of those things is getting cheap when priced in gold). What is clear is that gold is no longer cheap by any measure. I don’t think this type of analysis has anything to do with where gold price goes in the near-term (technicals and sentiment drive that), but it’s helpful to think about where gold is on an historical basis.

  • The Gold:Oil and Gold:Copper ratios are moderately high, and would be off the charts if oil and copper were to crash.
  • Rent on a nicer 1BR apartment in Manhattan has fallen from 8 ounces in 2001 to 2 ounces today. This is about what it cost in the 1920s-60s.
  • 10 ounces in 2001 bought a 12-year-old Honda Civic, and now it gets you a brand new one with extras. A Model T Ford cost 15 ounces by the 1920s. The VW Beetle cost 30-50 ounces in the ’50s.
  • Median family income in was about 50 ounces in 1920, 90 ounces in 1955, over 100 in 1965, 70 in 1975, 75 in 1985, 95 in 1995 and way over 100 in 2000. Today, it’s about 30.

On a purchasing power basis, gold is adequately priced – it is certainly no longer cheap. Of course, markets don’t care about this on anything but the longest term – gold was overvalued at $500 in 1979, but it still spiked over $800 and then fell to a ridiculously low level in 2000. In the scenario where the dollar goes to zero, everything will soar in dollars, not just gold, so you’d still have to evaluate gold in terms of goods and services.

I’m still in the dollar bull camp for the foreseable future. Treasuries are pointing the way (record low 10-year yields, 3.5% on the 30-year, almost like Japan), and it looks like another bout of deflation is underway, if you define deflation as a contraction in money and credit (if credit is marked to market). Europe’s soveriegn debt implosion is deflationary. The same goes for the Australian real estate collapse and the pending RE collapses in China and Canada, and the US muni and junk market troubles.

I don’t see the dollar as any worse fundamentally than the euro or yen, and much better technically. Japan’s history since ’89 is proof that printing and spending and running up huge public debt doesn’t necessarily kill your currency. When there is too much private debt going bad but not being written off, it overwhelms the mismanagement of the currency and props it up. It doesn’t matter what you think of the fundamental value of the dollar if you’re in debt and can’t find enough dollars to make your payments. And until asset and labor prices and demand for goods and services can justify borrowing costs, there’s no credit expansion so no inflation.

Sentiment-wise, we’ve still got a great long-term case on the long-dollar trade. Fear of the dollar has been widespread since early 2008, but the DXY has just bounced around sideways – no crash. The crash happend from 2000-08, while nobody but old-school Austrians noticed.

Iranian central bank dumps euros for gold and dollars.

Remember when Iran started pricing its oil in euros instead of dollars? It was April 2008, a few months after supermodel Gisele Bunchen refused payment in dollars. The euro touched $1.60 that month and had nowhere to go but down:

Yahoo! Finance

Having missed out on the dollar’s spectacular comeback, the expert timers in Iran are switching again:

The Central Bank of Iran (CBI) intends on converting about €45 million of its reserves into dollars and gold, Tehran’s media reported.

According to reports, the new monetary policy will be carried out in three phases, with the first phase – converting euro reserves into dollars – already underway.

CBI Chief Mohammad Bahmani hinted of the move in April, saying the Islamic Republic will turn to dollars in view of the euro’s poor performance.

Iran has been converting its currency reserve into euros since 2006 – a move meant to meet both Iranian President Mahmoud Ahmadinejad’s anti-US policies, and the American currency’s weakness.

The recent change stems from the financial crisis which hit the eurozone bloc following Greece’s financial struggles.

The euro-dollar rates have devalued by 20% since the beginning of 2010. Iran’s foreign currency reserves, which are estimated at $100 billion – half of which are in euros – had to sustain the loss.

I’m bullish on the euro, CHF and pound in the short term, but long-term bullish on the dollar. Here’s a nearly 30-year historical chart of the dollar index, showing that it has miles of room to run:

bigcharts.com

Do we finally have an intermediate bottom in the euro and franc?

Last night’s sell-off in risk brought new lows for the euro and Swiss franc, though no other currencies made lows vs. the USD. Now with today’s rally, EUR and CHF have spiked very hard. This jumpiness and the presence of an upslope in RSI bottoms on the hourly chart (and the fact that June would be month 5 of extreme bearishness), suggest that a relief rally could be forming. I would not be surprised by $1.28 for the euro and $.91 for the franc. As usual, I’m not counting on it (the daily chart would look better with a deeper low), but we do have the formula for a short-covering rally.

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Here’s the 4-hour chart of the franc. There is a strong buy signal here, as the new low was made with very weak selling according to RSI, which stayed in its uptrend.

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You can see on this daily chart that there is no strong RSI buy signal like there was 15 months ago:

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A sharp rally here would likely coincide with rallies in stocks and commodities, but I can see the a scenario in which gold and silver do not participate or even fall as everything else rises.

Also, I’m still long-term bearsh on Japanese yen, and this price does not seem like a bad entry for a short (I put one on at $0.01104 this AM, and also shorted Treasury notes for a short-term trade to balance the odds of a rally in stocks & commodities).

Dollar set for a fall?

Checking the early futures action, I see some strength has been building in several currencies vs the dollar over the past few days, despite their longer-term weakness. The dollar enjoyed a small rally against the european set late last week, putting the CHF, EUR and GPB in attractive positions for long trades. With sentiment entering its 5th month of extreme negativity, it may pay to be alert for signs of a rally (that is to say a dollar decline, and further yen decline too against the dollar).

Here are a few charts (1-hour bar), noting the RSI uptrends that have developed:

GBP:

Euro:

CHF:

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To wrap it up, here is the dollar index futures contract:

Swiss franc and euro look long-term weak, but extremely oversold.

Note the lack of divergence in RSI this time around, compared to late ’08 to early ’09 when CHF and EUR were preparing to rally (see my red arrows on the bottom of this chart).

This suggests that any rally that develops here (and I suspect that one will soon, since they are very oversold on several weeks of dismal trader sentiment) will not be as strong as what we saw in 2009, and that King Dollar is going to reign for a long time yet. Click the chart to enlarge:

TD Ameritrade

Swiss franc oversold and overbearish vs. USD

The franc has taken a beating against the dollar, since it pretty much behaves like a slightly harder euro. Here is an hourly chart (click to enlarge):

TD Ameritrade

Sentiment readings have been super bearish here for a couple of weeks now, so we’re set for a reversal. At the least, going long the franc is not a bad way to hedge a portfolio that is long-term short risk (stocks, junk bonds, commodities).

Jim Rogers discusses his euro long and stock shorts

I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long.  Here’s today’s Bloomberg interview.

Take-aways:

- Long euro as a contrary position. Too many shorts out there.

- All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.

- ECB buying government and private debt is wrong.

- EU is ignoring its own rules about bailouts from Maastricht Treaty.

- Governments are still trying to solve a problem of too much debt with more debt.

- Fundamentals are bad for all paper currencies. Good for gold.

- Is “contagion” limited now? Well, for those who get the money…

Here’s a longer interview from a few days ago on the same topics as well as stocks:

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- Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.

- Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”

- Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.

- Thinking of adding shorts in next week or two if markets rally (my note: they have now).

- “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.