Gold Setting Records in Non-dollar Currencies

By , Money Morning •

Money Morning Staff Reports

Gold's performance in 2008 could look like a real yawner.

After all, it only managed to eke out a 5.7% gain. Not the kind you'd normally brag about over cocktails.

As we rang in the 2009 New Year, gold at $850 an ounce (in U.S. dollars) was roughly 15% below its all-time record high, set in March 2008.

But everything in life is perspective. In a year when oil lost 59%, the Standard & Poor's 500 Index was down 38%, and the Dow Jones Industrial Average gave back 30%, things could certainly be worse for gold bullion investors. Much worse, in fact. Just ask the typical investor about his portfolio: He's likely to grumble, and change the subject.

As it turns out, 2008 marks the eighth consecutive year that gold has posteda positive annual return. It's now starting to look like the trade of the decade.

Truth be told, many are disappointed with gold's behavior during the October-November stock-market panic, too. But here again, it's all relative. When we compare the Standard & Poor 500 Index (a proxy for the market) with the SPDR GLD Trust (an ETF proxy for Gold) (GLD), we know where we'd rather have our money.

As this chart shows, from September to December, gold, despite its volatility, ended essentially flat in U.S. dollar terms, yet shows a marked recovery since the end of November. The S&P, on the other hand, looks like an Alpine ski hill heading for Jackson Hole. The divergence between the two is remarkable.

During last fall's violent stock market downdraft, the U.S. Dollar Index (USDX) put on a spectacular, unprecedented two month - 15% rally. It's spectacular because to get even a 10% move over an entire year is a big deal for any major currency.

But gold is still (mistakenly) considered by many as the “anti-dollar.” So its behavior during a U.S. dollar rally does not come as a complete shock in hindsight.

Yet the gold price we see is misleading in two significant ways.

First, try going out there and buying an ounce of physical gold. In normal times, the average coin dealer will charge in the neighborhood of 3% above spot price. This past November, that premium shot up by 3-5 times, with many charging 10%-15% above spot, plus eight weeks or more for delivery. So when buying an ounce of gold, how realistic is the spot price, especially during a panic? In the midst of the mayhem, one larger Canadian precious metals dealer, Kitco, saw its list of products shrivel overnight from about 16 items to merely three, due to a lack of supply.

Second, gold is quoted in U.S. dollars around the world. But India is the single-largest gold market, with the rest of Asia showing a strong affinity for the universally cherished yellow metal. Throw in Europe and Latin America, and you can see how most of the world looks at gold through entirely different lenses - through their own currencies.

To be fair, let's gain some distance from our own provincial viewpoint by taking a small trip around the globe. This way, we can get a handle on how the price of gold has behaved elsewhere. 

Euro Gold

During the anomalous spike in the U.S. dollar last fall, the European euro lost considerable ground against it. So gold priced in euros shot up. March saw the record of near € 650 gold bettered in September by € 670 gold. Europeans were clearly happy with gold's behavior, which currently sits around an all-time euro high of € 720.

UK Gold

Gold priced in British pounds sterling has performed astoundingly well. Brits saw gold at £ 500 per ounce in March, then £ 530 in September, and £ 600 by year's end. Gold, now at £ 650, is still setting new record levels, dating back to 1717 when they began keeping records.

Canadian Gold

Canadian gold investors have few gripes. In March of last year, gold was trading at C$1,003; by late September, the price was up by nearly C$ 50. And right now, it hovers at a record C$ 1,160 level. Despite the amazing strength the Canadian dollar has shown in recent years, gold has performed very well in this resource-based currency.

Brazilian Gold

Brazil is the most populous country in Latin America. And gold's performance in the Brazilian real did not disappoint either. The record set in March at R$ 1,719 per ounce was easily surpassed in September with a sharp spike to R$ 2,069. Today, it sits at R$ 2,115; which is R$ 415, or 24%, above its March levels.

Indian Gold

India's currency is the rupee (INR). And for traditional, cultural, and even practical reasons, Indians are the biggest gold investors on the planet. As in much of the rest of the world, gold set a record near INR 41,000 in March. It then pulled back in July, but spiked to a new record near INR 43,000 in September. At roughly INR 45,800 today, gold is priced way above its previous March and September 2008 record levels.

Chinese and Japanese Gold

If anyone should be disappointed with the performance of gold over the past year, it is investors in China and Japan. Gold's record in March, at CNY (yuan) 7,050, has not been bettered yet. September saw a spike back near the CNY 6,250 level, and gold currently rests at a price of roughly CNY 6,400 per ounce.

Japan's gold price hasn't fared much better. The March record near ¥ 100,000 per ounce remains unchallenged. Gold managed a rally to ¥ 95,000 in September, but has since fallen back to the ¥ 84,850 level.

So as the U.S. dollar rose late last year, the Chinese yuan and Japanese yen were the two major currencies that tagged along, making gold investors' relative losers in those nations. The Chinese and Japanese 2008 gold experience differs little from the American one. And yet, gold in U.S. dollars is currently just 8% shy of its all time record at $1,023.50.

Despite the recent American, Chinese and Japanese gold experience, most of the rest of the world's gold investors are a happy lot. When converting the price back into their home currency, those investors are basking in its glow, while gold sits at or near all-time record highs.

For now, however, gold is still priced in dollars for many market participants. The same is true for all other commodities. I expect that will change over the next several years. Scores of foreign central banks have indicated their intentions to lower levels of dollar-denominated reserves to reduce exposure. Meanwhile, Kuwait has dropped its dollar peg, opting instead for a basket of currencies. And Iran already trades some of its oil for non-U.S. dollar currencies.

As the U.S. dollar continues to lose value - and hence, its influence - on the world stage, commodities are increasingly likely to be priced either in local money, or to be quoted in a variety of currencies.

Heck, commodities may even be priced in quantities of gold before this is all over. Gold investors can only hope.

For now, as new price records are regularly being established, most aren't complaining about the value of their gold.

With their sights set on breathtaking new heights to come, American, Chinese, and Japanese gold investors are sure to see their patience rewarded, as have already so many of their fellow investors the world over.

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