This was sparked off by news from the UK based Independent newspaper the Gulf Arab oil exporting nations were secretly planning with Russia, China, Japan and France to set crude oil pricing in a basket of currencies instead of the US$. This basket would include the euro, yen, yuan and gold. If the story is verified, this is a signal the US$ a worldwide reserve currency is on the brink of a permanent decline. China has already hinted in recent months to diversify away from buying US Treasuries.
This headline-grabbing gold rally must be viewed with caution. If one believes in purchasing- power-parity theory eg. the price of gold per ounce should be the same in all countries (after adjusting for exchange rates) otherwise, arbitrage will happen ie. a person buys the gold in the cheaper country and sells this at a higher price elsewhere. On this basis, the price of gold should have reached a record high too in the local currencies of other countries.
However, the charts below indicate this did not happen. Something is amiss. While gold is up in US$ and close to its highs in rupees (India is an active gold purchaser due to jewellry demand), prices are still about 10% down from their highs in both euro and yen currencies. This indicates the strength comes from a relatively weaker US$ instead of a spike in real demand. Further, it also suggests speculation in the COMEX futures markets (which trades in US$) is at very high levels and this excess can be pricked at anytime (witness crude oil's spectacular fall in summer of 2008 from record US$147 / barrel).
Gold's breakout will only prove sustainable and convincing if all these countries trigger new pricing highs in their respective currencies. That time is not far off...but it is not this week.
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