A New Gold Index
January 16, 2004
I get a lot of feedback following each of these columns
and I read and appreciate every comment. While I seldom reply to
the messages (I also have work to do), I do intend to address some
of the questions in later columns. But please realize that I cannot
answer specific investment questions such as which stocks you should
invest in or what you should do with your money. If you want to
know what I do with my own money, you can subscribe to my newsletter.
Please visit my website (www.paulvaneeden.com)
for more information.
The gold price took a dive yesterday on concern that
the dollar may strengthen against the euro. This kind of volatility
is going to become the norm, not the exception, so it’s best
to get used to it. As the dollar declines, countercyclical rallies
in the dollar are going to become more pronounced, causing severe,
though temporary, declines in the dollar-gold price. These are,
to use a cliché, buying opportunities.
Since the price of gold is intricately linked to currency
exchange rates, how can we, without relying on any one currency,
get a better sense of what the price of gold is really doing in
a global sense?
I have talked in the past about the gross domestic
product (GDP) weighted index that I use to look at the gold price
and individual currencies from a global perspective. For lack of
imagination I call this index the PVE Index.
The PVE Index consists of thirty-six currencies: the
US dollar and the currencies of thirty-five of the United States’
largest trading partners. I started with the United States’
fifty largest trading partners but had to eliminate fifteen due
to lack of data. Going forward I hope to expand the index as I source
Each currency in the index is weighted by the GDP
of its issuing country. This is done so that small countries with
volatile currencies do not have an undue impact on the overall index.
A GDP weighting also allows countries to impact the index in relation
to each country’s contribution to the global economy. Therefore
countries such as the United States and Japan, or economic blocks
with a single currency such as the euro have a significant influence
while at the same time the collective effect of smaller countries
and their currencies is not ignored.
When used to measure gold, we get the PVE Gold Index.
Similarly, when used for a currency, such as the dollar for example,
we get the PVE Dollar Index. Regardless of which currency, or commodity
we plug into the PVE Index, what we get is the average, worldwide
trading pattern for that currency or commodity.
The chart below shows the PVE Gold Index and
the price of gold in US dollars for comparison. Remember that the
US dollar-gold price is one of the thirty-six components of the
PVE Gold Index.
There are several interesting features on this chart.
The most obvious is that the average, worldwide gold price did not
experience anywhere near the same decline as did the US dollar-gold
price. Because the United States represents 28.34% of the PVE Gold
Index, the effect of the US dollar can be clearly seen from 1996
to the end of 1997; but while the US dollar gold price declined
by almost forty percent, the average gold price in the world (including
the dollar-gold price) declined only about twenty percent.
This, of course, implies that the gold price in most
currencies did not decline at all during the period from 1996 to
1998, which begs the question: was there really such a terrible
bear market in gold during those two years? The bear market in gold
is generally regarded as lasting until 2001, when the US dollar-gold
price started to recover. In this chart you can clearly see that
the price of gold around the world started recovering three years
earlier, in 1998, and has been increasing since then at an average
compounded rate of just under eleven percent per year.
Because we can clearly see that the average gold price
in the world was increasing from 1998 onwards I find it hard to
believe there has been any conspiracy to depress the gold price.
If there was one, it certainly wasn’t very effective. There
is also very little evidence that central bank sales, or producer
hedging, were negatively effecting the gold price in any significant
The most prominent features of the average gold price
chart since 1998 are the announcement of the Bank of England auctions
that caused the gold price to decline in early 1999 and the Washington
Agreement (under which many European Central Banks agreed to limit
their gold sales) that was signed in late 1999. Notice that when
those two events occurred, the average gold price in the world was
steadily rising. It was only declining in US dollars and a few other
At the time though, the gold industry was obsessed
with central bank gold sales and the impact that producer hedging
was having on the gold price. The fact that the Washington Agreement
actually got signed is an indication that hardly anyone in the world
was cognizant of what the gold price was really doing. The US dollar-gold
price and the strength in the dollar were misleading.
Because we have both the US dollar gold price
and the average gold price in the chart we can see several interesting
features of the dollar during the nineties. Notice that the dollar-gold
price and the average gold price coincide from 1990 until around
the third-quarter of 1992. At that point the dollar-gold price starts
to deviate from the average and it has not yet recovered. In next
week’s column we will look at the reason for this deviation
and what it might foretell about the future price of gold and the
value of the US dollar.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
This letter/article is not intended to meet your specific individual investment
needs and it is not tailored to your personal financial situation. Nothing contained
herein constitutes, is intended, or deemed to be -- either implied or otherwise
-- investment advice. This letter/article reflects the personal views and opinions
of Paul van Eeden and that is all it purports to be. While the information herein
is believed to be accurate and reliable it is not guaranteed or implied to be
so. The information herein may not be complete or correct; it is provided in
good faith but without any legal responsibility or obligation to provide future
updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility,
or assumes any liability, whatsoever, for any direct, indirect or consequential
loss arising from the use of the information in this letter/article. The information
contained herein is subject to change without notice, may become outdated and
will not be updated. Paul van Eeden, entities that he controls, family, friends,
employees, associates, and others may have positions in securities mentioned,
or discussed, in this letter/article. While every attempt is made to avoid conflicts
of interest, such conflicts do arise from time to time. Whenever a conflict
of interest arises, every attempt is made to resolve such conflict in the best
possible interest of all parties, but you should not assume that your interest
would be placed ahead of anyone else’s interest in the event of a conflict
of interest. No part of this letter/article may be reproduced, copied, emailed,
faxed, or distributed (in any form) without the express written permission of
Paul van Eeden. Everything contained herein is subject to international copyright