First, the French vote "no" to the proposed EU constitution. Then the Dutch vote "no" - and now everybody is all up in arms.

Why?

Because everybody only looks at the next day's trading results.

This short term perspective on the markets has cost gold investors untold amounts of money, headaches, and heartache, so here is the medium to long-term picture of the story.

The "damage" to the euro is only short term, and not all that bad, if you look at it from a few steps back. And it remains to be seen who will end up suffering the most from the consequences.

Europe?

Or the United States?

It is imortant to remember a few points here that were made in earlier Euro vs Dollar articles:

1. In the current world economic environment, a weak currency is a "plus" and is eagerly sought by all participants.

2. The Euro vs Dollar Monitor derives its name not from a naive faith in the "superiority" of the euro to the dollar, but from the fact that the ongoing war between these two currencies is great for gold, no matter which one of these currencies "wins" the war - and that remains true even if neither of them survive it.

So, on to the meat of the matter.

First of all, politically speaking, European integration has surely been dealt a severe "one-two" knockout blow. In my eyes, that's a good thing, though. I like individual countries with individual sovereignties, and I dislike centralization of power.

But the question on gold investors' minds, of course, is not the political one. It's: What will happen to the euro, and to the dollar, and to gold?"

• Doesn't a defeat of the European integration process throw a pall over the entire concept of the euro as the currency of a single European trading bloc?

• Will this not mean that the euro has lost credibility and will continue to lose credibility?

• Doesn't the recent upswing in the dollar's fortunes mean that the world is swinging back toward favoring the dollar over the euro as its main trading currency?

• Doesn't this mean that the price of gold - since inverse to the dollar's forex value - is doomed?

Whoa, there, wait just a minute. Let's take this one step at a time.

First of all, the EU has pre-existed the public discussion about a European "constitution" for many, many years. It was not born out of a Constitutional convention like the US was. The treaty of Maastricht that formed and held the EU together until now is far "stronger" and provides for a far more centralized EU government than the Articles of Confederation did here on this continent.

European economic and monetary union was deemed far more important by the designers of the euro than the EU constitution, and it was implemented far earlier. Also, the wording of the EU's "Growth and Stability Pact" was going to be watered down considerably by the proposed constitution, so the fact of its failing can actually be seen as a plus for the euro.

Moreover, the ECB still has its independence, and it doesn't exactly have a history of bowing to member states' political pressure.

Then, France and the Netherlands are still members of the EU and of the euro zone, and neither of them have expressed a desire to leave that arrangement.

One of Italy's top honchos just did express this sentiment today, but he is not one of those who would participate in the decision, if one was to be made. And besides, maybe the Union would be better off without Italy.

The dollar's foreign trade and current account deficits haven't changed or suddenly disappeared, either, and Japan isn't suddenly going to buy back the ten billion dollars' worth of US treasuries it sold last year. Nor is a strong dollar increasing the Dow's chances of surpassing its 1999-2000 high anytime soon.

On Tuesday this past week, June 1, 2005, we received news of a "bad" ISM survey and the price of US debt went up and yields dropped while the Dow had a nice rally, too. Unusual, to say the least. The press tells us that the runup in treasuries was a "flight to quality" by investors scared of a bad economic picture in the future - but a flight from what? Surely not from the Dow and the other stock indexes, which increased across the board that day.

At the same time we are told that the Dow gained because the bad economic performance indicated by the ISM survey makes a lot of future rate increases unlikely.

So, let me get this straight: Indications of poor economic performance are now good for the Dow, right?

And the drastically lower long term rates resulting from the treasuries' uptick are good for the dollar, even though the rising interest rate differential was supposed to be the reason why the dollar rallied this year in the first place, right?

And the dimmer outlook for the US economy, the one that makes future rate hikes more unlikely, are also good for the dollar's reputation in the world, right? (If that's the case, then why doesn't the sorry performance of the EU economies make the euro rally?)

Confused?

Can't blame you. So, let's cut through all of this confusion right now.

A lower euro actually helps EU economic performance because it is rather export oriented these days, especially since intra-EU demand is so weak.

But a stronger dollar hurts US economic performance, because our economy really isn't all it's cracked up to be as we keep finding out (it's strong only in relation to Europe and Japan, which both suck, so there's no pride in that). And that is true especially after the latest ISM results.

If a strong dollar is so good, why does Bush make himself look like a fool by constantly haranguing the Chinese to do what they surely must refuse, i.e., revalue the yuan, now? Doesn't he know they have no choice but to ignore him, thus making him look like something far less than a statesman?

Would a weaker dollar or a stronger dollar put more pressure on Asians to keep buying the dollars they so detest? Naturally, only a weak dollar/strong euro would make them do this. So, who really benefits from a weak euro? The Asians, of course, because this way they can quietly unload their excess dollar and treasuries - which is exactly Rob Kirby and Bud Conrad have shown they were busy doing since March 2004.

Is this continued dollar-strength giving the Asians more cover to dump their unwanted dollar reserves into this "strength?" You bet!

Is euro-weakness the best guarantee for EU economies to catch a breather and recover a bit by being able to augment their sorry domestic demand with higher profits from exports? You bet!

So, who's the "winner" - and who's the "loser" here? And what does all this mean for the euro's long-term outlook?

What does it mean for the dollar's long-term outlook?

And what does all this mean for gold?

If gold is still perfectly dollar-inverse (which is no longer the case), the ability of foreign CBs to unload dollars onto the backs of international traders in this environment of dollar "strength" surely isn't dollar-supportive in the long run - so it's good for gold.

If foreign countries' investors aren't buying US assets and debt any longer to equalize the current account deficit (and we now know they don't, except maybe for the Fed-financed Caribbean hedge funds), then what does that mean for the dollar?

If they don't invest in US stocks anymore because the US economy is so shaky that it warrants slower rate hikes in the future, is that dollar-supportive?

If the Fed really will see itself forced to abandon its continuous rate hiking pace because the economy isn't strong enough to take it, how does that bode for the future of the dollar?

On the other hand, if the Fed keeps raising rates and thereby throttles US economic performance, how will that affect the dollar long term?

Do you see a pattern here?

Despite all of its artificially manufactured economic "prowess", the worldwide situation is so bad, so enormously out fo whack, so inundated with debt, and deficits, and imbalances of all sorts, that the US economy simply cannot sustain a strong and rising dollar.

Despite all of its political woes and economic weakness, the EU's currency cannot and will not fall forever, and even if it falls for a long time, that will just help the EU economies.

So, who's the winner, and who's the loser, here?

Sooner or later, the world's investors will realize that neither the US, nor the EU, nor the yuan, can offer what they promise - and people will figure out that the Chinese were right to advise their citizens to accumulate gold bullion (which by the way is a first in the history of modern government, to my knowledge). Consequently, investors will start accumulating gold bullion themselves very soon.

So, relax already.

Margin Note: The preceding was written on June 1, 2005. Yesterday morning (June 2nd) I get up kind of late and - surpriiiiise! Gold was up more than six dollars. And what happened today, June 3rd? The dollar shot up despite a weak payrolls number -- and gold didn't even flinch! It closed $0.80 higher for the day and over four dollars higher for the week, even though the dollar closed the week 2.2% higher.

When was the last time that happened?

I didn't expect it this fast, but that just goes to show how quickly things can turn around. All you need to do is keep your nose pointed in the direction where gold is going long term - and know why.

And Monitor subscribers do know why.

Got gold?