Saturday, January 24, 2015

John Rubino (Dollar Collapse) Confused on Gold Price

An article by John Rubino on Dollar Collapse (cross posted on Zero Hedge) leaves me wondering how much he knows about the pricing of Gold (and questioning why Zero Hedge would perpetuate misleading information, yet again).

He highlights a chart which shows the spot price of Gold in Euros soaring over the last month and then claims:
"Yesterday the European Central Bank acknowledged that the currency it manages is being sucked into a deflationary vortex. It responded in the usual way with, in effect, a massive devaluation. Eurozone citizens have also responded predictably, by converting their unbacked, make-believe, soon-to-be-worth-a-lot-less paper money into something tangible. They’re bidding gold up dramatically."
He implies that the rising Gold price in Euros is directly a result of Eurozone citizens rushing for the metal and bidding the price up. At first I thought it was a slip, but he then repeats his sentiment later in the piece:
"Right now, the fear is country-specific. Europeans start to distrust their government and shift to gold, without necessarily questioning foundational concepts like big, activist government and central bank management of fiat currencies. They still assume that the euro would be fine if managed correctly."
The problem with these comments is that the spot price of Gold in Euros is not directly determined by citizens of the Eurozone. While there is no single market for pricing Gold (either in physical or "paper" form), the spot price is typically determined from the exchange of US Dollar denominated contracts on futures exchanges (there are some exceptions such as recent introduction of yuan-denominated Gold futures contracts, but even Gold futures on the Eurex are priced in USD). So the Euro price of Gold is determined by the price of Gold in US Dollars divided by the EUR/USD exchange rate.

To give you a calculation as an example...

US$1294oz / 1.1252 (EUR/USD) = €1155oz.

So the soaring price of Gold in Euros (that John Rubino focuses on) is not a result of Eurozone citizens in a Gold buying frenzy stocking up on the shiny metal (though traders in Europe could could contribute by buying Gold contracts or selling Euros), but rather was caused by Gold strength in US Dollars and Euro weakness relative to the US Dollar.

Much the same as Gold strength in US Dollars and Australian Dollar weakness relative to the US Dollar has resulted in a nice price surge locally (definitely not a result of Australians rushing to buy Gold):

On a side note, it's time to don your Gold A$1600 hat!

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  1. Could I suggest you may both be wrong?

    "caused by Gold strength in US Dollars"

    Why should Gold strengthen? You state no reason.

    Could I have the temerity to suggest that Gold acts in a very strange way.
    Sometimes as a commodity. Sometimes as a currency. Sometimes contrary to official reasoning.

    When it acts like currency I imagine that it's like the liquid in Galileo thermometer at a constant level with the other currencies being the glass bubbles floating and changing their positions in the liquid.

  2. I agree that Gold's behaviour can differ at times, but not sure I understand how that makes me wrong (on what I've written above). You are right, I could have elaborated, but time was tight (have been away for a couple of days hence slow reply to your comment) and I have detailed here in the past what I think has been driving the price of Gold. Try:

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