Gold to De-Couple from the Euro

By: Julian D. W. Phillips | Fri, Feb 1, 2008
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All markets, in their search for a reliable formula that satisfies the scientific and mathematical belief that market relationships are precisely measurable in something else, believe that gold is responding in an opposite way to the $. The corollary to that is, therefore it must be moving in synch with the €? In fact, in the € it has been rising. It is important to look a little more closely at this formula and the realities behind it.

The Eurozone is relatively self-sufficient as we see by the actions of the European Central Bank officials, acting against inflation rather than tending to growth, unlike officials at the Fed in the States. But are they? Would Europe be able to stave off a recession if the States were suffering from one? More to the point, would they be able to retain growth if the $ fell against the €? A really strong € would savage European competitiveness over time, so Europe cannot afford to see the € too strong and remain healthy. The cheapening U.S. competition, gaining ground as the $ fell would eat into European exports and force Europe to begin to fragment economically or to retaliate.

This week has seen the $ head down again as the interest rate benefits of the $ proved less attractive than those of the €. But then we saw the $ suddenly recover way beyond a level justified by the fundamentals on the $. Clearly global entities that wanted to see the $ hold value and its exchange rate level moved into the market and drove it back up, despite the trend to sap the $. But then, after the Fed drop the Fed Funds rate another 0.5% the $ sank another 1+%.

If theory were dominant, the European economy is set to turn down and follow the States into recession on the back of a strong €, but we don't believe for a moment that Europe is going to sit idly by and watch this happen. The first point of retaliation has to be to weaken the €. The second is to stimulate growth and place "price stability" on the back burner. The resulting lifting of inflation, will be a price they have to pay, but if 'price stability' leads to falling growth and a recession in Euroland, then expect to see the € de-couple from the $ and an exchange rate battle ensuing, bringing into play market forces that even George Soros, the great Pound Sterling speculator, never dreamed of. The trend of the last year in particular has been for Central Bankers to move to the view that international trade competitiveness is first prize in the exchange rate markets. Only in the major three trading blocs in the world has the view been any different, but for how much longer?

Can Europe benefit from the stimuli the Fed and Bush are pumping into the U.S. economy? Yes, provided they are not disqualified by a strong €. So expect the € to de-couple from gold soon. After all it remains a currency whose value is presided over by men. It remains simply an obligation of these men, dependent only on the confidence that they can inspire in the monetary world. When its qualities are viewed against those of gold, then one wonders just how could markets relate the two together.

Now look beyond the time that the € and the $ move against each other, whether in some sort of unholy alliance [between the two Central Banks] to maintain a 'trading band' within which to move. On the side of this the rest of the currency world will search for some stability in exchange rates with their main trading partners [each currency in its own place in the currency pecking order] resulting in them moving, roughly, all together in a seemingly 'stable' market. The buying power of each one will drop as far as internal and imported inflation drops them. This is the direction global currencies are headed in already.

Will this type of exchange rate stability, including between the € and the $ bring back confidence? Not in the slightest. It will give no more comfort than one lemming has, following the next over the cliff.

But gold, true to its inherent nature, alongside silver will reflect the subsequent rapidly rising global inflation, this time in an atmosphere of superficial comfort, like the man who fell off the fifty-story building. As he passed the twelfth floor, he was heard to say, "So far, so good!"

The € will de-couple from gold because it is a currency and it is reliant on the global economy to the extent that its Balance of Payments is critical to its good health. It is also printable, as we have witnessed this last six months. It is only a matter of time before the market sees that and takes gold up and away from it.

"The € will de-couple from gold, because it is a currency!"

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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