23 days ago I wrote an article Trade Gold In EUROS Instead of Dollars? Switching May Make Sense Soon where I presented the case that the GDP of the Eurozone didn’t support the appreciation the EURO was receiving over the U.S. Dollar, which also was experiencing lousy GDP numbers. It was the fact that the EURO was approaching its all-time high against the U.S. Dollar that made no sense.
Couple this with the fact that Obama was on a whirlwind Asian trip in support of the beleaguered buck, Timmy Geithner was preaching his mantra of a strong dollar again and the Elliott Wave Theorists perfect world scenario was waiting for the “external influences” to cease, the logical conclusion was to predict there might be a reversal in the Dollar forthcoming and thus a fall in the U.S. Dollar price of gold. Being that the EURO was so heavily overvalued compared to the U.S. Dollar, there could still be some profit made by buying Gold in EURO’s rather than U.S. Dollars.
Gold Priced In EURO’s vs. U.S. Dollars the Last 30 Days
Below you will see the charts to show this is in fact what’s occurring. The first chart I posted in the Nov. 18th “trade gold in EURO’s” article mentioned in the opening paragraph. The second chart is from the Dec. 10, close.
You can see from this second chart that the gap is widening between gold priced in Dollars and gold priced in EURO’s. Gold in fact has actually appreciated 1.72% more priced in the EURO the last 23 days versus the U.S. Dollar based on these charts, but as I type, gold is down $18 from the $1,129.80 price in that chart, the EURO is down vs the dollar again today sitting at 1.4621 and the Dollar Index also had a big spike up to 76.526 today as shown in the following chart.
What’s important to note is the Dollar Index did not break below it’s March 2008 low of just under 72. For that matter, it didn’t even break below 74.
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. When the Dollar Index finally does break below that March 2008 low, you can bet the third stage “euphoria” for gold will have begun.
Gold Naysayer’s Will Return In Force
During this current U.S. Dollar Gold price decline, depending on its severity, you’ll see the gold naysayers return in force comparing this recent run up in gold to the 1980’s bubble when gold doubled in price in one month and then crashed. Some Elliot Wave Theorists are calling for gold to go back to the $700 level. If it did, again, in their “perfect world” scenario, you can bet the press will be very negative. You can also bet that I’ll be there writing my usual comments that this is only a temporary setback.
For example, those saying there is no inflation are correct in pointing out the current low CPI numbers as recipients of Social Security checks know this very well. But there are also consequences to the trillions of dollars making up our deficits this administration and prior ones have accumulated with no end in sight as they try and pass legislation after legislation where the only result is bigger government. But keep in mind, that while we are experiencing some deflation with this current bounce in the dollar, as long as the price of gold doesn’t crash, like some Elliott Wave Theorists predict, and stays stable, the actual purchasing power of gold would increase. So even a slight fall in the price of gold wouldn’t be so negative as long as the U.S. Dollar was appreciating.
What should really have these gold naysayers worried however, is the fact that gold’s most recent rise in price was at a time when the dollar was paying basically zero interest. In the late 70’s to early 80’s, Volcker raised interest rates to where the interest earned on the dollar, say in a bank CD or even a money market, became much more attractive to the investor as gold pays interest. There wasn’t much competition to the dollar 30 years ago, so savers sold their gold and took advantage of the high rates.
But what would happen today if the Fed raised interest rates?
What would that do to the stock market? to bonds? Can the Fed afford to pay higher interest on the debt to creditors? Hardly. Bernanke and the Fed are stuck between a rock and a hard place. They will eventually be forced to raise interest rates when the dollar starts to break down. This is the future.
For now, don’t expect the Fed to raise interest rates anytime soon and enjoy the ride up by investing in gold with EURO’s, but keep checking the Dollar Index and watching out for those “external influences.”
And as I always say, holders of physical gold care not that it falls in price to $700 or $800 an ounce on its way to $2,000 and higher.
1/6/10 UPDATE: Dennis Gartman now saying to buy gold in EUROs.
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About Doug EberhardtDoug 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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Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.