From the June 01, 2009 issue of Futures Magazine • Subscribe!

Trading through gold-colored glasses

In the first article of this two-part series on the evolving interaction between gold and currencies, we studied the transition from the gold standard to fiat money, which is not pegged to any specific value, and looked at the implications for inflation under a fiat system. This takes on a new relevance today amid a world financial crisis; all major governments are creating money at astonishing rates to keep their economies afloat.

Currencies are evaluated as cross- rates, such as the Japanese yen in terms of the British pound, or JPY/GBP. One shortfall in crossrates is they don’t necessarily reflect global inflation. For example, if both the yen and the pound drop 10% in buying power, the JPY/GBP crossrate won’t reflect it.

The forex markets are unique in that in addition to the typical buyers, sellers and commercial interests, the government plays a relatively large role. This is significant because governments do not necessarily have profit motivations. Their goals relate to issues such as trade balances. This role has expanded greatly since the advent of a fiat money system. Fiat money changed many things, and its effects are felt across markets. Even the relationship between long-term interest rates and stocks didn’t become significant until Nixon floated the dollar.

We can get some measure of perspective back, however. We can apply the age-old concept of gold as money to modern markets by showing the major currencies as crossrates with a gram of gold instead of the dollar as the measure.


For our new golden crossrates, we’ll look at the Japanese yen and the euro, or JPY/GLD and EUR/GLD. We will express both yen and euros per grams of gold. Let’s work through the calculations.

We will use the closing cash price of gold in New York. This cash gold is priced in dollar per ounce, so we have to convert it to grams. We just multiply the price of gold by 0.0352739619 (one gram = 0.0352739619 ounces). This will convert the price of gold from ounces to the price of gold based on one gram.

Next, we look closely at the currency crossrates, EUR/USD and JPY/USD. If we multiply all gold prices by 0.0352739619, we can now create a new crossrate that is USD/GLD—that is, dollars per gram of gold. If we divide the dollar-based crossrate by our standard EUR/USD and JPY/USD rate, we will get a crossrate expressed in gold terms.

When we look at both the yen and euro this way, it provides a new view of exchange rates. The devaluation of both the yen and the euro is evident (see “Gold crossing”).

Japan has long maintained a weak currency policy. A weak yen helps in selling cars overseas. Because of the weak dollar policy of the United States in recent years, the JPY/USD relationship suggests the yen is slightly higher over the past 10 years. If we look at a Toyota Camry in 1999 vs. now, the same car is only 17% more expensive when priced in dollars due to the 73% decrease in the value of the yen vs. gold (as opposed to the yen’s 12% increase vs. the dollar). Based on the Consumer Price Index, prices have increased 228% since 1999, so a car price should have doubled over this period to keep up with the other costs , according to

This devaluation of the yen is part of the reason U.S. car companies cannot be profitable; they have lost half their buying power since 1999, which has not been covered by price increases.

The larger point, however, isn’t the effect of this trend on the auto industry. Inflation over the past 10 years has been hidden by a systematic devaluation of the world’s currencies.


For purposes of comparison, assume a €100,000 contract and a ¥1 million contract. We will use cash forex 24-hour data. We will test these markets using a basic 20-day channel breakout. At this point, our goal is to find bias, not uncover a viable trading strategy, so interest, slippage or commissions are not included (see “Losses uncovered,” page 46).

The winning percentage and win/loss ratio both fall with the gold crossrates. The reason is clear: Trends are shorter. The same effect happens with the yen; however, it’s not as dramatic because the yen was not as profitable as the euro using a 20-bar breakout.

That our gold-quoted currencies do not trend like dollar-based currencies suggests a theory about why currencies trend in the first place. Consider that currency price changes result from fiat money policies. Because fiat money has its value controlled by a central bank and because currency values are quoted as crossrates, countries intervene to keep currency values within desired ranges relative to each other. Because all currencies are rising and falling concurrently, getting a true value of a currency is difficult — unless you compare that currency to gold.


The economy of Japan suffered a lengthy deflationary period (1989 to 2003). The Japanese central bank played an active role over a period of 15 months, starting from June 2003. It intervened in the JPY/USD, printing Y35 trillion, which was used to purchase $320 billion. Those same U.S. dollars were invested in U.S. Treasuries.

The effects were:

• Yen weakened against the dollar

• Japanese exports improved

• Japan emerged from deflation while the United States came out of its 2001-03 recession. U.S. interest rates stayed low despite growing government and trade deficits.

Even though the Japanese win the title of World’s Biggest Currency Manipulators, the Swiss and the European Central Bank (euro) don’t want to see their currencies rise too much in value vs. the dollar. It’s generally understood that intervention takes place when a currency overshoots a desired value. The currency markets are complex, however. The interaction of domestic interest rates, money supply and local economies all affect relative currency values.

The fiat money system and the worldwide manipulation of relative currency values drive currency trends. This also explains why the trend-following nature evaporates when we express crossrates in gold terms.


Previously, we have argued that Western central banks actively manipulate the gold and silver markets. Now after months of financial turmoil around the world and constant government intervention beyond scale, that view has been vindicated. Gold and silver have become attractive targets for manipulation due to the influence gold and silver prices have on interest rates.

A review regarding the effects of the gold price suppression scheme in 2007, which is available at the Gold Anti-Trust Action Committee (GATA) Web site ( Here’s an excerpt:

Gene Arensberg, a market analyst with, and Ted Butler, a silver market analyst, did an interesting study of the reports of U.S. Commodity Futures Trading Commission (CFTC) markets. They found out that in August 2008, only two banks held over 60% of the short positions in silver on the Comex. This was a startling finding, unprecedented and a very likely strong short position illegally. It meant that silver was down and that free market was destroyed. This could be possible only with the manipulation of a few (maybe one or two) powerful and wealthy market participants. This concentrated short position sparked complaints, which made the CFTC's enforcement division investigate again the silver market, which has expanded to include the gold market as per Bart Chilton, CFTC commissioner.

In November 2008, Arensberg found that the latest CFTC report showed that around 3% (maybe fewer) banks held 50% of the short gold positions on Comex, and more than 80% of the short positions of silver. Besides that, Butler produced a copy of the letter from the CFTC to U.S. Rep. Gary G. Miller (R-Calif.) in which the CFTC had inquired about the reason behind the silver-short position.

If we understand correctly, this implies that the acquisition of Bear Stearns by JP Morgan Chase in March 2008 had caused this silver-concentrated short position. So, by extension, by approving the acquisition of Bear Stearns by JP Morgan, the Federal Reserve also approved of the JP Morgan position in silver.

JP Morgan also has been the bullion banker to the largest gold shorter in the last decade, Barrick Gold. Barrick argued to the U.S. District Court in New Orleans in 2003 that they ought to enjoy the same immunity as the central banks against lawsuits. Moreover, JP Morgan is also the world’s largest issuer of interest-rate derivatives instruments, by which interest rates can be suppressed.

All of this led GATA to suspect that either JP Morgan is an agency of the U.S. government or the other way around. Whatever the case, both have shared a close relationship since the days of J. Pierpont Morgan.

Furthermore, the Federal Reserve and the Treasury Department have yet to release documentation regarding the U.S. gold reserve, citing as the reason that the information, if released, might compromise the proprietary information of private companies. This reason is beyond comprehension for some and raises doubts of the secret manipulation of the precious metals market via the U.S. gold reserve.

There also has been a concern that there are more approved gold sales since 2007, especially by the International Monetary Fund (IMF). The IMF had long proposed to sell 3,200 tonnes of gold to raise cash because developing countries do not, or are unable to, pay the interest on IMF. However, the IMF allegedly has held off selling gold for this purpose, raising suspicions that perhaps it doesn’t have the gold to sell in the first place — at most, possessing only a weak claim on the gold reserves of its member countries, especially those of the United States. Moreover, the United States has a veto on IMF gold sales and may be withholding approval.

If the IMF should ever sell off its gold, the amount would not be much and gold bulls need not worry, as pointed out by Columbia University Professor Robert Mundell, Nobel Prize winner in economics (1999), at an annual meeting of Committee for Monetary Research. Mundell mentioned that any gold sales by IMF would be snapped up quickly by China to expand its foreign exchange reserves.

It has always been the case that the velocity and the volume of money and credit greatly influence prices. This means that the interference in the market forces creates money and credit. However, in recent times, money and credit amounting to billions and trillions have been coming and going quickly, which only political forces can explain — not the on-the-ground realities.

Markets are determined by political moves and decisions and not the primary market forces; the demand and supply that result suggest that market advice is no more reliable. Politics play a big part in market-driving questions. Which countries will cut interest rates and by how much? Which country will subsidize their corporations and banks and by how much? Which country will get loans from the IMF and World Bank — or unlimited currency swap lines? Which company will be bailed out? Which central banks will sell off gold to keep the price low? When will the world stop lending money to the United States that can never be repaid?

These are political questions, not economic ones, and they only can be answered by political decision makers, not the forces of supply and demand.


Even though we can get a better view of the world currency markets by looking at these currencies in terms of gold, it’s not a perfect view. We would need to extend this perspective to other areas of the economy. For example, we could examine currencies relative to 1% of the CRB index, or another measure of raw material prices. A basket of commodities is harder to manipulate than gold or silver.

Other options are industrial and base metals, such as platinum, copper or nickel. These all would present different views of the interaction of the world currencies and lead to a greater understanding of these interactions.

In today’s world, a trader cannot trade currencies without understanding the effects of government intervention and the role of the Federal Reserve and other world banking organizations when it comes to the effect of world monetary policy on the world economy as a whole.

We are at economic crossroads. The world is in a global recession and increasing the world currency supplies will undoubtedly have a lasting effect on the world economy. Indeed, long-term damage, or at least a fundamental economic shift, will follow. Not just currency traders, but all of us, need to be nimble, active and creative about how we perceive the world financial landscape going forward.

Murray A. Ruggiero Jr. is a consultant. His firm, Ruggiero Associates, develops market timing systems. He is the author of "Cybernetic Trading Strategies" (Wiley). E-mail him at

About the Author
Murray A. Ruggiero Jr.

Murray A. Ruggiero Jr. is the author of "Cybernetic Trading Strategies" (Wiley). E-mail him at

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