As Global Currencies Weaken, Gold Posts Triple Digit Gains Worldwide

By , Money Morning •

[Editor's Note: Part II of two installments. Part I ran yesterday (Tuesday).]

As countries around the world with unwanted strong currencies move to cheapen them by printing more money, slashing interest rates, or just "talking" them down, investors are left with a key question: Just what are those strong currencies declining against?

If your answer is "against the currencies of their main trading partners," you are partly correct. But those declines are only temporary. If strong-currency countries are successful in their devaluation efforts, then their counterpart countries - their trading partners who don't want their own currencies to go too high - will at some point launch a similar devaluation initiative.

It has become an endless round-robin game - except to call it a "game" is a little perverse. All holders of currencies suffer with the purchasing-power decline of their money. You go lower, but then your trading partners go even lower, and then you have to counter by cheapening your money yet again.

Thus what started as one country trying to keep a strong currency from hurting its economic interests morphs into an endless cycle that doesn't do much to help the world economy in the long run.

But this powerful global trend does benefit one particular “currency.” In fact, it has benefited investors by generating returns in the multiple hundreds of a percent - minimum - to anyone on earth who has owned it since 2000. This currency is the world's oldest form of money, one that's been in use long before any of the other currencies were even dreamed about. And it will be used long after all of them are merely memories chronicled in history books. It is a form of money that cannot be printed at will and artificially cheapened. And even though all central banks own it, it is the creation of none of them.

In case you haven't already guessed, I'm speaking about gold.

All That Glitters ...

Sure, you can play the currency market. I've done it for over 35 years now - and quite successfully, too. You can buy a currency that is way too cheap and wait, getting paid nice interest while you wait. At least you could have done that until recently. With world interest rates now so low, no matter what currency you hold, you get paid nearly zero.

More importantly, if you sell one currency and buy another, you are not assured of the huge, 100% gains like you were until last year. I bought the euro in 2001, when it was worth 83 U.S. cents, and sold it last year just about the time it rose to $1.60. So with the interest earned during those seven years also factored in, it was a nice double. I bought the New Zealand dollar back in early 2002 when it was 40 U.S. cents and sporting a huge interest yield. I also made over 100% in a few years when the currency rose to nearly 80 cents and the great yields compounded.

Since last year, however, I've seen no currency where the prospect of its doubling is apparent. So all the talk about currency trading is something I would ignore. Traders don't usually make money in the long run with fluctuations of 5% to 10%.

For most people, it's much better to take a position in a currency that will benefit from this trend of competitive devaluations and stick with that.

That brings us back to gold.

Not too long ago, gold was money, and had been for recorded history. U.S. dollar bills stated on them that they were good for, say, 20 dollars worth of gold. But that tie has been cut for the last several decades.

I've been an investor since 1971, when I was 16. I've never had any other job. So I've become more attuned than most to new trends throughout the world economy. And even while I was selling my U.S. dollars and buying cheap euros back in 2000-2001, I started to notice this trend that I've labeled as “competitive devaluations.”

In my newsletter back in early 2002, what had been a strictly biotech letter was finally able to talk about any asset area. When I first publicly recommended gold - in the Feb. 15, 2002 issue - it was still trading at slightly less than $300 an ounce. The basis for my recommendation of both the metal and gold stocks was this trend I had seen of countries cheapening their own currencies against those of their trading partners in a competitive race to the bottom.

Shall we now see what gold has done in terms of the major currencies of the world since then?

The View From Abroad: South Africa

 

In Part I of this two-installment report, we talked about the South African rand. The rand has been the strongest currency so far this year. It is a big gold producer. Yet look at the price of an ounce of gold since 2000 in terms of the rand.

gold

On this chart - courtesy of kitco.com - start by looking at the left side of the chart. This index, and the green line, tracks the currency in question, in this case, the rand. The right-side index, represented by the black line, illustrates the price of gold in terms of the U.S. dollar.

You can see that, back in 2000, when this trend of competitive currency devaluations took hold, it only took only about 1,500 ZAR to buy one ounce of gold. Late last year, you needed about ZAR 10,000 ZAR.

The rand has strengthened since the start of the year, and has actually the strongest of all the major world currencies this year. You can see this by the last drop on the 10-year chart above. Today it takes less ZAR to buy that same gold ounce than it did late last year. Currently it takes only about 7,500 ZAR.

Even so, by carefully studying the last 10 years, it's clear that the rand has certainly cheapened in terms of gold, or to turn it around, gold has soared by hundreds of percent in terms of the rand. To be exact, at this writing gold has risen nearly 380% against the rand, and this even though the rand has strengthened in the last few months.

But with all the screaming going on in South Africa about its recently "strong" currency, look for the value of the ZAR to drop, not just in terms of other paper currencies, but in terms of gold. That green line should be going north again, after the short, sharp rally of the last few months.

Gold Gains Nearly 200% for Australians

Now, let's go to another currency that has risen sharply this year, the Australian dollar (AUD).

Given that Australia is another major gold producer, you'd expect that its currency would hold its value against gold, but my study of a 10-year chart of the Aussie tells another story.

Ten years ago, it took only AUD$375 to buy one ounce of gold ounce. A few weeks ago, that same ounce would have required about AUD$1,550 for purchase. In the last few months, with the Aussie dollar stronger against nearly all other currencies - as well as against gold - it takes less of the Aussie to make such a purchase. Right now, for example, it "only" takes AUD$1,178 to buy an ounce of gold. But even so, with the recent "strong" Aussie, gold has risen 195% in terms of the Aussie dollar during the last decade.

Gold Posts Triple-Digit Gains Worldwide

You see the pattern. The Brazilian real (BRL) has also been a success story recently, and people have started to buy it. Yet in terms of gold its value has pretty much consistently plunged over the last decade. Gold has soared more than 300% in terms of the real.

Let's turn next to North America, where we find that the Canadian dollar has held its value in terms of gold much better than its U.S. counterpart.

While gold has risen "only" 178% in terms of the Canadian dollar since 1999, it has risen fully 260.5% against the U.S. dollar. No wonder there have been calls for the end of the American dollar as the reserve currency of the world. The U.S. dollar just hasn't demonstrated any long-term strength. Sadly, there is no paper currency ready to take its place. Any change in the U.S. dollar's status is probably decades away.

China's currency - the yuan, or “renminbi” (CNY) - is not yet even internationally traded. Until July 2005, it was tied to the U.S. dollar. But since then, the yuan has risen about 24% against the dollar, so it doesn't take as much more of China's currency to buy an ounce of gold as compared to the U.S. dollar. That's another way of saying that the Chinese currency has held its value in gold better than the dollar.

If this continues, and the Chinese economy keeps growing, it may be only a matter of time before China's currency becomes a major - and perhaps the major - world paper currency. China is already the world's biggest gold producer, and the central bank buys 100% of the gold produced.

As great as the Chinese economy has been over the past decade, and as powerful as that Asian nation has become, gold has still soared about 200% in terms of the yuan. But that's still not as much as the 260% it has risen in terms of the U.S. dollar.

Another big gold-producing country that has come up in the world is Russia. But its currency, the ruble (RUB), has collapsed in terms of gold.

A decade ago, it took only 6,000 rubles to purchase one gold ounce. A few weeks ago it took RUB 36,000. The ruble has rallied a bit, and today it "only" takes RUB 29,186 to buy that same ounce of gold. So gold has done better in terms of the ruble over the decade than it has against the U.S. dollar. Gold has soared 358.5% in rubles, versus the 260.5% gain it has posted in U.S. dollar terms.

To wind down this global tour, I want to talk about how gold has performed against a currency that has really lost value over the past decade. That currency is the Mexican peso (MXN). Until just recently, gold had soared by more than 500% in terms of the currency of Mexico, a country that paradoxically is both a major gold producer and the world's biggest silver producer. The peso has also risen a bit in terms of many currencies in the last few weeks: Gold now has risen "only"
417% in peso terms over the past decade.

Finally, I want to show you gold in terms of a currency that has long been regarded as the strongest on earth - the Swiss franc. For decades, the Swissie has risen against the U.S. dollar. When I started investing, the Swiss franc was only about 22 U.S. cents. Now it is more than 90 U.S. cents.

But that strengthening means nothing to gold. Even the franc has plunged in value in terms of gold: Gold has risen almost 155% against the Swiss franc. A Swiss investor who just turned in all his cash and stocks into gold back 10 years ago would have done very well.

In fact, just to check, the Swiss stock market index shows that the last decade has been even worse against gold than just the currency. But this is also true against virtually all stock market indices in the world. Just being in cash has been better than being in the global stock indices since June 1999. Just take the Swiss market as an example (and many have been worse): On June 19, 1999, it closed at 7,190. Exactly 10 years later, it was 5,330.

Think about what this means. The Swiss stock market has fallen 25.9% in Swiss currency terms over the past decade. Put another way, just holding the Swiss franc would have meant a gain of 35% against putting it in the Swiss index. And yet over that same period, gold has risen 155% against the same Swiss franc. So when you consider how much gold has risen in terms of most stock markets, the rise in the value of gold has been staggering.

I'm just using the Swiss stock market as an example. I could do the same with all the other major stock markets, and it wouldn't be too much different. Switzerland is a rich country, but if gold has soared compared to that country's stocks, you know something extraordinary has been going on.

Yet I'll bet you that not one person in 10,000 sees this.

You have it within your hands now to be that one.

[Editor's Note:  Chris Weber has been investing since 1971, when he was 16 years old. He's never been forced to hold down a “regular” job. Instead, he's made a lifelong study of the world's financial markets, and has developed a global investing strategy that for decades has consistently enabled him to ferret out the world's best profit plays.

In the 1970s, Weber rode the wave of the precious metals and foreign currency markets, switching into U.S. Treasury bonds in the early 1980s in time for that huge bull market. In the 1990s, he profited from plays both in the emerging markets and from the biotech sector. So far in this decade, Weber has made the correct calls in precious metals (he got in back in 2001) and in global currency shifts. Finally, after getting his readers out of stocks back in November 2007, Weber in March made some specific stock recommendations - at the front of the recent near-record-setting rebound. To find out more about Weber's strategy, and his newsletter, please click here.

And be sure to check out Part I of this two-part report, which ran yesterday (Tuesday) in Money Morning.]

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