Trading Euro Misery with Gold

By: Adrian Ash | Tue, May 29, 2012
Print Email

Is the Euro as good as gold again, or is gold investing only as good as the Euro...?

So "hedge funds find ways to trade Euro misery," according to a Reuters headline. And with no hint of irony, the newswire includes gold in its list.

Haw! "Greenlight Capital's David Einhorn recently said he is bullish on gold and gold miners, in part because of concern about the fallout from a Eurozone meltdown," Reuters goes on. Yet the Eurozone meltdown, to date, has done nothing for gold investing but show it up as a failed "safe haven" - a has-been, a fraud, a charlatan.

Today's drop back through $1560 per ounce came precisely as the single currency sank through $1.24 on the foreign exchange market. So is the Euro as good as gold, or is gold investing in fact only as "good" as the Euro?

Dollar Gold vs. Euro Gold (June 1968 = 100)

Our chart shows the gold price in Euros, and before that in Deutsche Marks, compared against the price in US Dollars. Both are converted into an index, starting at 100 in June 1968, when the daily Frankfurt gold fix began as a benchmark for Germany's hard-money savers.

And as you can see, the metal has been far more volatile in the greenback than in its European competitor. But no doubt German investors still appreciated the 7-fold gain of the 1970s.

"Until gold broke above the €350 per ounce barrier that had contained it for four years," wrote John Hathaway at Tocqueville Asset Management in mid-2006, "conventional wisdom held that the currency was a superior way to hedge Dollar weakness because it had both yield and liquidity in its favor."

Calling the Eurozone's 2005 relaxation of its Stability Pact rules on debt and deficits "good news for gold", and noting gold's clear break upwards through that €350 level, Hathaway said gold was already suffering a different "identity crisis", then being mistaken for just another commodity rising on the tide of Asian growth.

Fast forward to mid-2012, and gold has clearly broken away from that disguise in turn, doubling in terms of the CRB commodities index since the financial crisis began. Yet here it is again, unnerving both US and British investors by putting on a funny accent and waving its arms wildly. Not even Eurozone savers are choosing gold investing above "safe haven" government bonds. Meaning the government bonds of Germany, however. Not the government bonds of Spain or Italy. Because unlike gold, not all Euro debt is created equal - fungible, incorruptible, and tightly supplied by nature itself.

That lack of consistency is in fact the big problem, forcing debt costs higher for Madrid and Rome, just as it did for Athens, Lisbon and Dublin. Because domestic banks, pension and insurance funds are legally bound to avoid foreign exchange risk by only buying assets denominated in their domestic currency. Yet today, and thanks to the Euro, that means Spanish banks can join the rush to bid up German Bunds...leaving Madrid without a forced buyer, as used to happen in recession.

The real identity crisis, meantime, doesn't lie in the gold market. Instead, it lies in the Euro - which is either the Deutsche Mark or the Drachma, but cannot be both. Applying the fiscal policy of the former but the monetary style of the latter has got Europe to this happy pass.

Let's see how gold performs as the crisis makes Brussels and Frankfurt jump one way or the other - together or separately.

 


 

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.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

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.

</body>
All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/