Gold has moved with the € and in the opposite direction to the US$ for months now. The main reason is because U.S. Investors have linked the performance of the $ to the € as a true reflection of the $ currency value. Of course this implies that the € is the defining currency against which to measure the performance of the $. But is that even reasonable? We think not.
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Is Gold about to decouple?
August 28, 2008
Gold has moved with the € and in the opposite direction to the US$ for months now. The main reason is because U.S. Investors have linked the performance of the $ to the € as a true reflection of the $ currency value. Of course this implies that the € is the defining currency against which to measure the performance of the $. But is that even reasonable? We think not.
The €.
We are now seeing the U.S. economic malaise cross the Atlantic and affecting Europe. Inflation is running and growth is sagging with many believing that Europe is already in a recession. It’s now felt that this has not just hit Europe but the rest of the world excluding Asia. But in the Eurozone such an event is likely to have a more disruptive effect than in the States for so many unevenly matched economies are situated there. With one currency, the €, providing the means of exchange for all, capital can flow wheresoever it wishes with no restraining influence of a changing exchange rate. So a strong economy is likely to draw from a weak one potentially sucking the economic strength from it in economically pressured times. Right now the South of the Eurozone from Spain through France etc, are performing considerably weaker than the North, in particular Germany. The pressure on national governments to take action to protect themselves from this is great and posing a danger to the single currency, for it is most unlikely that any European sovereign nation will quietly accept the loss of its economic force. The benefits of the Eurozone will pale in the face of such disruption.
The mere fact, now established, that the exchange rate of the €:$ needed ‘management’, first by holding it in a trading range of $1.60 - $1.54: €1 shows how the € will not be allowed to be the measuring line for the $. Second, in the interests of international competitiveness and monetary harmony the € will not be allowed to continuously move higher against the $.
So why should gold move with the €?
Both economic areas are facing similar problems including rising inflation, both are currencies based on the same criteria and both economies are slowing, but most important of all is that the G-7 group of nations do not want a separation of the two currencies beyond certain limits. No such restraint should be placed on gold, which knows no nation. It should move against all currencies and may well have started to do just that already. As the $ rises against the €, now almost 10% in the last month having broken out of its trading range [with intervention?] gold fell through support in almost a straight line, forced down by short-term traders until it hit the $780 area.
Gold beginning to de-couple?
Then in the face of continued $ strength gold became vigorous, once this support was hit, fully. Physical demand appeared almost prematurely, out of India, the world’s largest gold buying nation, one that has been almost absent from the gold market for the last six months to a year. Now in the belief that the gold price is going to hold these levels or rise, they felt secure enough to buy again. Investment demand, having been almost paralysed in the face of a strong $, still sits on the sidelines, while long-term demand for silver is now appearing in quantity. Some long-term holders of gold sold, but not large quantities, in the belief that the rise in the gold price is far from over.
Central Bank selling has reverted back to a trickle of sales, so the force driving the gold price down has come almost entirely from COMEX in New York. The futures market will create opportunities, but will not hold a direction once other demand factors push the other way. They look for short-term opportunities only and close them as fast as they were opened. If they can drive a price either way they will and then change in a heartbeat. At this moment, they have largely shot their bolt, having taken the net long speculative position [relative to the gold price] down to what we consider a low point. To sell more would be to expose themselves to dangerous ‘short’ risks, positions they will only hold briefly. The moment they feel a fundamental upward force, have no doubt about it, they too will change direction and buy in bulk.
So now we are at the point where the gold market is poised to see rising long-term demand on the physical front, as the high season for gold is about to begin and the funds on COMEX have drawn back the string of the bow to its maximum. The action in the gold market of a recovery back above $820 is in the face of a slightly weakening $ only. So we feel that it is likely that the $ can continue strong, while gold rises as well.
As the $ still holds strength, it is logical that the next phase of the evolution of gold is for the gold price to move with a strong $ upwards and upwards in the € too. This is a large step for gold and for the market, because it accepts that currencies, no matter which ones, are not effective value measurers, relative to gold, but gold is an effective counter to all currencies including the €.
Once gold is seen to have de-coupled from the € and by extension the $, the gold market will come into its own internationally. Demand from Europe as well as the Far East will ensure that it is not simply a counter to the $ but extends to a counter to rising inflation and falling markets alongside falling economic confidence in general. Then gold will have matured into a truly global investment medium capable of reaching new heights and beyond. In the next few months we expect this evolutionary step to be completed.
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