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The Last Tango of the Currencies Will End in Gold's Favour

Euro Index

The debt problems now weighing on the Euro have inflicted a devaluation of around 6% this month with no recovery in sight for the PIIGS, Portugal, Ireland, Italy, Greece and Spain. The harder the ECB tries to badger and cajole the PIIGS into accepting a serious dose of austerity, the more the people, who will have to carry this burden, revolt.

We have seen riots in the streets in Athens, demonstrations in Madrid, marches in London, all expressing their dissatisfaction with the status quo. Heavy defeats in regional elections have been inflicted on the ruling party in Germany, which must be of grave concern to Angela Merkel, the Chancellor of Germany, assuming that she wants to stay in office. The same goes for Spain where regional elections have gone against the current incumbents.

In the mean time European Union officials are running hither and dither with arm fulls of newly printed euros in an attempt to support the latest basket case. However, Standard & Poors cut its outlook for Italy to "negative" from "stable" on Saturday, following a downgrade by Fitch on Friday for Greek debt. So we have a situation where there could be very well be political changes at the top, however, the debt, just like a rotten smell, remains.

This slippage, experienced by the Euro has had the effect of boosting the dollar as these two currencies are the main constituents of this basket of currencies. As the chart above shows a fall in the value of the euro, the chart below shows a rise in the value of the US Dollar. This race to the bottom between the currencies will continue as each sovereign state believes that a weaker currency will boost exports and ultimately will get them out of this mess. The fact that each currency devaluation negates the previous one would appear to have gone unnoticed, by those involved.

US Dollar Index

The chart above shows the dollar rallying this month as its inverse relationship with the Euro continues. The demise of the euro hides the fact that the dollar is not well, so this rally may be short lived.

So what does this tango of the currencies mean for gold? Well, sooner or later the investment community will realize that a flight to safety will be a flight from anything paper, no matter who's portrait is printed on it.

Gold

So now you are thinking; will the summer doldrums cap the progress of the gold prices as interest wanes and trading becomes lackluster, could be. However, there are a few factors to be considered here, a civil war in Libya, general unrest in the desert, Al Qaeda, a leaderless International Monetary Fund, the US debt ceiling, a wobbling coalition government in the UK, supply side difficulties in the mining sector and the specter of inflation. All in all we expect the summer to be choppy with the real fireworks for gold and silver beginning mid August and continuing through to January 2012.

Having acquired a certain amount of gold and silver our strategy will be to look for bargains amongst the quality producers as they have production and cash flow. The junior/exploration sector still appears to us, to be an outside punt and so we will allocate only a small amount of our capital to them. To add a little spice to the mix we will look to the options sector with the view to turbo charging our trading account.

Go gently, but do prepare and get into position as this gold bull has a long way to run.

 


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

 

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