Gold vs. Euros: 7-Year No-Brainer Finished?

By: Adrian Ash | Sat, Feb 21, 2009
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"...No, it's not much of a punchline. But perhaps owning gold will at least raise a smile..."

FOR THE BEST PART of seven years, it was a real no-brainer: Buy Gold, sell the Dollar.

Why? Because every day was a GUDD day:

Gold Up, Dollar Down...

That's how my former colleague (well...boss) - Bill Bonner of Agora Inc. - christened the phenomenon in his Daily Reckoning. And thanks to the Federal Reserve slashing its rates way below everyone else, it's how things were pretty much day-in, day-out between 2002 and the end of 2008.

The trade worked in reverse too, however. Dollar up? Gold down.

Which meant investors sat on the wrong side of either got whacked when the no-brainer finally proved to be brainless last year.

First both the Euro and gold got smashed, starting in spring 2008. Versus the up-start challenger for "reserve currency status", the Dollar recovered one-half of its 2002-2008 losses inside just 3 months (July to Oct. '08). Versus the dumb lump of metal - which it had usurped 50 years earlier - the Dollar knocked gold back by one-third.

But then - this year...and only so far in '09 - anyone selling the Dollar for Euros while Buying Gold also got a real brain-ache on top.

Call it diversion, call it decoupling, or call it a cab if you must.

But given the political, financial and capital risks facing the European single currency right now, we guess it means gold now stands apart as the safe haven of choice.

Treasuries are out...unless you think earning 2.5% per year until 2039 is a safe bet. Clearly bond buyers don't, selling 30-year notes lower from New Year's - and pushing yields more than one per cent higher - even as world equities dumped over one-sixth of their value.

So the dash for cash of course means buying Dollars for now. Especially as the greenback's challenge for world domination is hamstrung by its weak friends and neighbors.

The World Bank said Baltic states "look particularly bleak" on Friday. Germany's finance department both denied and confirmed it's going to launch joint-issuer bonds with the Eurozone's feeblest members. "The banking problem in Europe is becoming more severe," chipped in Nouriel Roubini, serial laugh-a-long doomster, to Bloomberg TV.

"You have a series of countries that are really in trouble," he added, ribbing the Baltic states, Hungary, Belarus and Ukraine. Hence the ongoing rise of the Dollar against the politically stretched single currency. Hence the clear Dollar-hedge of Buying Gold alongside - you know, just in case the greenback starts sinking, even as the world's other main paper slides further.

"We're going to add $4 trillion to $5 trillion to the US public debt over the next few years," chirrups Roubini, ever the joker. "Down the line, maybe two or four years, there may be a downgrade of even the United States."

Boom-Boom? Well, no...It's not much of a punchline. But perhaps holding gold will at least raise a smile if things really do take a turn for the worser.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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