Gold: No Longer Euro's Copilot

By: Alex Wallenwein | Wed, Sep 21, 2005
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Gold had a great run these last few days. It actually sagged a bit toward the middle of last week, but then came roaring on Thursday, maintained its momentum on Friday, and actually outdid itself on Monday.

On Friday, gold made it just barely above last December's high of $458.00, and now it seems solidly lodged in the $460s. In fact, on Tuesday in London, gold made a high of over $470 before falling back to $467.

The best part of it is that gold has broken its dependence on the euro for rising in dollar terms. It's no longer in the copilot's seat.

All the way until about mid-year 2005, gold was a slave to the euro. When the euro rose, it rose. When the euro fell, it fell. This was not the case at all compared to any other currency, including the yen.

There's only one negative connotation to all this: Gold stocks didn't look as enthusiastic on Monday as one might have expected. Both the HUI and the XAU actually lost ground on this six-dollar-plus gold rise.

All in all, though, gold is doing exactly what it is supposed to be doing around this time of year:


It's about time, too. Gold enthusiasts surely needed that shot in the arm.

Since the fall season is having such a nice start, this is a good time to review how we got here from the days of the late nineties doldrums, right into the middle of a multi-year, possibly multi-decade long, gold run.

What Started All Of This?

There is really no way around the recognition that the slow, painful, and agonizing but ultimately successful launch of the new euro currency has more than just 'something' to do with it.

Th euro was launched as a new accounting unit for the twelve euro member countries in January of 1999. There was no cash component to this new currency yet (which really made it even more of a pure fiction than the other fiats at the time).

After its launch, the euro began a slow but steady drop against the buck and most other currencies on the foreign exchanges, but something happened in 1999 that no one foresaw: the twelve euro mmber banks made a pact to limit their collective annual gold sales to 400 tonnes per year - and the dollar-gold price had a hiccup of major proportions.

Within two weeks the price of gold shot up by over 80% into the $320s. It was soon brought back under control, but the hiccup left a bad taste in everybody's mouth - at least in the dollar world.

Then, in early 2000, came Placer Dome's announcement that it would no longer increase its hedge book but would start selling into it. Ouch! Such things were unheard of until that time. The bullion and central banks had just finished potty-training their little gold mine customers to the point where they would always come running to them whenever they needed cash flow and price-security, because short-selling was the name of the game.

In October or November of 2000, Saddam announced he wanted out of the dollar and sell oil only for euro from then on. The UN gave him permission - but the US withdrew that permission real quick like. His bold move eventually landed him in a spider hole outside of Baghdad and then in a prison cell where he remains to this day.

The euro bottomed right about that time and began its slow move back toward dollar parity. A few months later, in March of 2001, gold put in the first of its double bottoms near $250 an ounce, soon followed in July of that year by another.

At that time, the dollar was still frolicking and swinging from the rafters. That finally changed when the euro's cash component was launched in January of 2002. Within a month, the dollar topped and began sliding, sliding, and then sliding some more, all in a very graceful, slow-mo arch down the banister of the international forex staircase.

Beginning this year - and I mean at the very beginning of this year, the dollar initiated its three-quarter long dead-cat bounce - but by now we hardly even care anymore, because the inverse link between it and gold has been broken, finally.

A lot of people in the meantime have written a lot of things about what the European CBs motives were in fashioning the pact formerly known as the Washington Agreement. "Just a ruse", a way to "write off previously made gold loans that won't come back", etc.

The Euro's Undeniable Effect

But, whatever the Europeans' real motivations, the pact had the undeniable effect of at least changing public perceptions as to how much official gold will be available to undermine the price despite chronic and worsening supply shortages. It removed a point of uncertainty which the US - until then - knew expertly how to exploit.

It also undeniably shows that the ECB and member banks are no longer participating in the dollar-forces' "suppress-gold-at-all-cost" scheme with quite the same enthusiasm they had before.

Certainly, they are still in the gold-control business, but the emphasis now is on a managed rise, rather than an all-out suppression effort.

If you ever had any doubts about the effectiveness of the Washington Pact's gold sales limits, just look at what's happening right now.

The member countries have exceeded their self-imposed gold sales limits about a month or so early, and sure enough, gold started rising. If anyone ever doubted that official sales have a depressive effect on the gold market's brain chemistry, this could be proof enough.

Europeans Stick To Their Guns

But it also proves that the Europeans are sticking to their guns. They exceeded their limits slightly - and then stopped.

On the other hand, the fact that the limit was reached and even exceeded early shows there was a dire need for gold price "management" in this year of the Lord called 2005. The interesting thing is that we still have a full week ahead during which no sales from the euro members are forthcoming, so there still could be some fireworks set to go off before Friday.

Another point: Lest anyone start to think that the severely undermined euro has lost its power over gold price developments from here on out (since it can't even manage to rise against the trade-gap embattled dollar), a weak euro is good for Europe at this time. It causes the EU hardly any problems economically, except of course with respect to their own oil tab. They still need to exchange euros for dollars before buying most of their oil, after all. But that may soon change as well.

As has been shown, a weak euro is also in no way an obstacle to rising gold anymore, as it was during the vast majority of time throughout the dollar's three-year long controlled fall. We are now at the point where gold doesn't care anymore whether the dollar rises or falls - but any prolonged falls from now on surely will serve to further support rising gold.

Euro-CBs Are In Control

What can be expected from here on out will be demonstrated by how the European CBs act when they get green light for picking up their gold sales again.

But for now, the lagging gold shares portend at least a brief correction, some time during the next couple of two or three weeks. I expect gold to consolidate somewhere between the $450 and the $460 levels during that time.

Hey, psssst! Gold is still a buying opportunity...!

Got gold?


Author: Alex Wallenwein

Alex Wallenwein
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