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Gold Bull Market? No, Currency Bear Market!

Gold has risen in price because currencies are losing their value...

HAS GOLD been in a 'bull' market these last ten years? Technically, yes, because the Gold Price rose. 

But technical analysis of bull markets should reflect the domination by profit-seeking investors, if it is to work properly. With those investors in charge, there has to be a point where those investors believe that the fundamental reasons for holding gold are giving way to prompting sales, writes Julian Phillips of

If investors are not profit seekers, but very, very long-term holders, then sales won't come from them. 

The only way that prices could drop when long-term holders fail to sell is for investors overall to simply stop buying, leaving supplies piling up and prices dropping. So we are not looking at what usually constitutes a 'bull' market. 

What did happen that made people think that gold was entering a 'bear' market was the 'credit crunch' that caused a major price correction from over $1,200 to $1,000 as the impact of the 'credit-crunch was felt, after which it rose steadily through to $1,500 where it is now consolidating. 

This was caused primarily by investors frantically searching for liquidity to cover exposed leveraged positions or to close them. All financial markets fell at that point. The emerging world at the time was nowhere near strong enough to counter the developed world's falling markets. Gold saw a correction for good reasons. But it was simply a correction, symptomatic of a major fracture of the monetary system and by no means a departure by investors from gold. 

Apart from the 20% correction, it has moved solidly up from $300 to current levels. Each time a correction was felt it was shallow and consolidated for a while, as it did until the latest break through $1,600. Initially the shallow consolidations lasted for a long while, up to 15 months, but have shortened over time, the recent one of three months.

Again we say, this is not typical of a 'bull' market that will eventually fall back from whence it came. We believe that gold is not in a 'bull' market, because it is changing its shape and nature permanently. 

Our reasoning is not academic posturing, but a reflection of the realities that have taken place over time and those that confront us now. Because it is perceived to be an alternative wealth-preserving asset, a counter to a failing monetary system, it is not a simple commodity moving up and down with the flows and ebbs of economic cycles, it is a valid measure of monetary values. 

To fully understand gold and to answer the paragraph's question, we must take a glance at history. Throughout history the sight of gold has had a remarkably different impact on our emotions than any other metal. It's not the color or qualities that affect us as much as the underlying knowledge that gold has always been money. 

It was always money until 1971 when President Nixon and the IMF in their infinite wisdom decided it would no longer be so. If you were to bring back to life a monetary official from the distant yesteryear and told him that we became so civilized that we turned to paper issued by governments as money, he would give you a wry smile. 

Well the experiment began on a seemingly sound footing when oil was firmly linked to the US Dollar and vice versa. Undoubtedly it was felt that oil had all the characteristics that money needed and by tying it to the Dollar, via the oil price, the Dollar became as good as oil. It also helped that the US dominated the oil producers who were dependent on the US for their security. 

With the support of the entire developed world the US Dollar stood completely un-backed and entirely reliant on the wisdom of the US Treasury department and the US Federal Reserve for its reputation. Like the branches of a tree, other nation's currencies grew to depend on the Dollar for their acceptance in the global monetary system. Even now you will hear the media keen to hear gold analyst's forecasts of the Gold Price, by which they imply the only valid measurement would be a Dollar value.

For the last 40 years so far, the Dollar has reigned as money, with gold sidelined as a mere metal. In that time the US Dollar — along with other major currencies – has seen a remarkable 'bull' market, establishing itself as the unit in which all things are priced. 

The paper currency system has been a phenomenal success, particularly when one thinks that in 1971 it looked as though the Dollar had lost its international value. There were so many Dollars after the War that they became known as EuroDollars because of the payment of salaries to US armed forces stationed abroad. It looked as though the Dollar was being rejected by Europe, when President de Gaulle led the leading European governments to exchange their Dollars through the 'gold window' of the US Fed until 1971. 

Such was the need for oil that Europe acceded to the might of the Dollar and accepted the closing of the gold window at a time when the US was in full ascendancy and the Dollar moved into a 'bull' market. And the world has had that monetary system until now.

But the US took that opportunity to exact a tribute from the rest of the world using the Dollar in that it allowed a persistent Trade deficit to occur over decades. Essentially that meant that the US simply printed new Dollar to pay for imports. No real exchange had to take place to cover the deficit. So foreign governments, including oil producers filled their coffers with promises of payment by the US government in the form of Dollars. 

Then came 2007 and the credit-crunch. With it came the reality that a currency's first duty is to the nation that issued it. The supply of those currencies had first to look after price stability at home. This too was translated into controlling inflation at home. 

But a large part of inflation is imported, particularly through the oil price as we are experiencing now. So governments then pushed central banks to promote growth in the face of imported inflation. The credit crunch forced the central banks to add their monetary force to the battle against deflation. Quantitative easing followed. Suddenly, the deflation holes were filled with new Dollars. All in all the US Dollar has fulfilled its function of caring for US domestic monetary issues. 

But what of its role as the global reserve currency? China sits with $3 trillion, oil producers more trillions, the rest of the surplus world a few more trillion. All of these holders are watching themselves holding money that's losing value. They hold far too much of them to be exchanged for other assets, but frightened of being real suckers, they are racing to spend these Dollars before a real global currency crunch comes. 

Look back for a moment at the last four years since the credit crunch...

  • The reputations of both the Dollar and the Euro have been hammered.
  • Slowly but surely gold and all other products are seeing their prices being quoted in other currencies as well as the US Dollar.
  • We are fully aware of the race by China to see the Yuan act as a global currency –indeed a reserve currency. 
  • We are fully aware of the attempts by surplus nations to reduce the vulnerability of their reserves to a fall in the exchange rate value of the Dollar against their currencies as well as against other currencies. 
  • It is clear that nations are doing their best to lower the value of their own exchange rates to the Dollar in an attempt to maintain a semblance of stability against the Dollar. This means falling with it. 

Whichever way it eventually turns out for currencies, their relationship with gold is changing by the fall in their value against gold. Be careful saying that the Gold Price is rising, because then you are caught in the currency trap. Currencies are falling against gold...

It is crystal clear that currencies, led by the Dollar and the Euro are in a 'bear' market as reflected by the rising price of gold.

The emerging world has not been exposed to the developed world's gold markets for that long, so have not picked up that way of thinking. All that the Chinese are seeing now is that their national paper currencies are buying less and less each month and gold is worth more and more in their currency. Their thinking remains uncluttered by the currency experiment of the last 40 years and clearly sees the dropping value of their money. 

What is clear to them and the rest of the emerging world is that their currencies are falling against gold and that gold is real money when push comes to shove.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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