Thursday, February 25, 2010

Gold Stalls in $ and Soars in €

Something's up with gold and the euro. We know EUR is under major pressure right now, and has been since November. But just to demonstrate what's happening currently, consider this: gold closed Friday at $ USD. In EUR, on the other hand, gold closed at €826--an all-time record high!

This is a very interesting paradox, especially for people like myself who look at gold as much closer to a currency than a commodity. Remember, the all-time high for gold in USD was back on December 03, 2009 at $1226. Today's close in USD terms at $1126, we're a flat -$100 (-8.1%) off the USD high for gold--and yet we have a new high for gold in EUR. That obviously reflects EUR weakness, but I think it reflects more than that.

When gold was at that USD high $1226 in December, it was trading at about €808, which was also at that time an "all-time high" for gold in EUR. So, gold hit highs in both USD and EUR at the same time in December, and now EUR has been hit again. Since the first "high" in EUR, gold gained 2.25% against EUR and lost 8.1% against USD before hitting the second, new all-time high today at €826. But if you look at the USD v EUR, you'll see that USD has moved from 0.66 on Decemeber 3rd to 0.74 today--a 12.2% change. In other words, while USD gained 12.2% against EUR, it only gained 8.1% against gold. Do you see where I'm going with this?

What seems rather bizarre to me about this week's USD-EUR-gold drama is that gold is "supposed to" drop when USD gains strength against other currencies--especially EUR--not record gains against both USD and EUR. I just say "supposed to" because people who deny that gold is a currency are always using it's sensitivity to USD-EUR as "proof" that the market only views gold in terms of other currencies, and thus it is strictly a commodity. Well, their "proof" just vanished, because now we have gold doing things independent of USD or EUR, and the market indeed treating it more like a currency. This is demonstrated by the fact that USD gained 50% more relative to EUR than it did relative to gold (12.2% v EUR; 8.1% v gold). I think this is important because it appears that gold, as money, is in a unique situation. It is currently at a high against EUR and about 8% below the high in USD. If USD strengthens more against EUR, this will only increase the price of gold in EUR, leading to more EUR highs. Conversely, if EUR strengthens against USD, it will only come with a drop in USDX and thus the value of USD, which will likewise lead to an increase in the price of gold in USD. The US Dollar Index v Gold is clear, and can be seen on when you compare charts of USDX v gold (all data from Feb 19 2010):

Here's USDX:

Here's Gold:

And here's my cut-and-paste blend of the two (red is USDX, grey is Gold):

These charts say, "USDX down, gold up." So again, if EUR weakens, it will result in newer, higher highs against gold. If USD weakens, it will drive down the USDX and weaken also against gold. It seems that EUR will be under a lot of pressure at least until this Greece mess gets straightened out, which, of course, has been pushed out another month. And speaking of Greece, they are certainly wishing they had some gold right now--well, actually, they are more than wishing, they are blaming the Germans for the Nazis for having stolen it decades ago. The plot gets thicker.

(Sidenote: this Dubai thing is not over, either. Not by a long shot: its appears right now that the offer from Dubai World to its creditors will be $.60 on the dollar, and no interest payments--a 40% haricut, and no payments! Needless to say, this is a developing story. Time and secret bankster meetings will tell what the Greek mess sorts out to, as well.)

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