On November 18th, 2009 I wrote an articleTrade Gold In EUROS Instead of Dollars? Switching May Make Sense Soon. In this article I was challenging the notion the EURO was approaching its all-time highs again:
Realize this….. the European Union is in just as bad of shape as the U.S., adding more debt to their economy and no real GDP growth yet the EURO has been rising against the dollar and is close to its all-time high again.
I posed the question, “Does this make sense to you?”
I included in my analysis that while U.S. Dollar gold was breaking to new highs the Dollar Index was not confirming this movement by breaking to new lows. In fact the Dollar Index didn’t even break 74, over 2 points higher than the March 2008 lows.
Fast Forward 23 Days (the Actual Call)
On December 11th, I wrote an article confirming gold traded in EURO’s was starting to make sense. In this article I said the following;
It is my feeling at this point in time, barring any “external influences,” that the U.S. Dollar Gold trade is one that might make a few people uneasy while the EURO Gold trade might actually make you some money.
I will also say that for the U.S. Dollar Gold trade we are still in the second and longest stage. It is during this stage that you will see swings up and swings down as weak players are bucked off the bull.
This is what we have seen occur in the past 60 days. The Dollar Index bounced to over 76 at that time.
What’s Going On With Gold
January 20th I updated my analysis and showed how the gold EURO trade was up 2.27% for the last 30 days. I had said that’s not a bad years return in this market environment.
The scenario I painted at that time was analyzing the Dollar Index and Gold from a Dow Theory perspective. The non-confirmation aspect to Dow Theory where one Index doesn’t confirm the other was how I was analyzing the Dollar Index and the U.S. Dollar price of gold. The non-confirmation of the Dollar Index hitting new lows at the same time gold was breaking out had me looking for other opportunities in gold.
To understand this thinking, one must know that gold is just a shiny rock. It’s what it is priced in that matters. Gold priced in EUROs where the EURO currency had undeservedly appreciated close to its all-time highs provided the set-up for a low risk vs. reward trade.
This trade has been escalated by the problems with the PIGS of the Eurozone; Portugal, Ireland, Greece and Spain.
Gold Naysayers Come Out In Force, As Predicted
Of course, I predicted the gold naysayers would come out in force. They didn’t disappoint.
I refuted those attacking gold including; Dave Ramsey, Harvard Economics Professor Martin Feldstein, Money Magazine’s Stephen Gandel, Fortune Magazine’s Senior Editor, Shawn Tully and even George Soros who said “Gold is the ultimate Bubble.”
If Gold is the Ultimate Bubble George Soros, Then Why Is It Up 7.92% in EUROs the Last 60 Days?
While the Dollar Index has climbed to over 80, the EURO is breaking down from the 1.49 price of November 18, 2009 price of 1.49, currently trading around 1.36.
In the last 60 days, you can see by the chart below gold has risen by 7.92% priced in EUROs. Not bad for a two month’s return…
What Will Happen Next?
While no one can claim to predict what will happen next with gold in Dollars or EUROs, one can look at the economic data and make educated guesses.
My analysis of there being no reason for the EURO approaching its all-time high was based on my analysis of the GDP data coming out of the Eurozone where it was mostly fueled by government spending. The call to actually trade Gold in EUROs came when the EURO gold chart showed a crossing of the U.S. Dollar Gold. The EURO Gold had some catching up to do and the Dollar Index didn’t confirm the U.S. Gold new highs.
The reason to stay in the EURO Gold trade is because of the situation with the PIGS. Things will get worse, but there may be some temporary reversals that always come as with any trade.
Where Do You Draw the Line?
Some people might be happy with almost 8% in two months. Others may want more. Greed will always get in the way of profit.
Mish Shedlock said just the other day that the EURO could fall to 1.15. I look to get opinions from all sources I can to form my opinion. Some of the Elliott Wave theorists are calling for the Dollar Index to trade above 90. When that occurs, I’d want to take some profits, if not all. The EURO could very well be around that 1.15 level by then.
CAVEAT: There are always “external influences” that can change my mind. But I don’t see any of those occurring to help the EURO.
They can definitely occur to hurt the dollar and keep it from reaching the 90-95 range on the index. That’s why throughout many of my posts on gold, I always say; “A holder of physical gold cares not that it falls to $700 on its way to $2,000 and higher.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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