Gold and the Euro

16/07/2010 by Philinje.

The theory I’ve been developing for over a month is that gold is tracking the Euro more than the dollar, inversely. In other words, as the Euro goes up, gold goes down. That also means as the dollar goes up, gold goes up, but not as directly.

In other words, the old inverse relationship with the dollar has shifted to the Euro. This may be temporary, and all theories are pointless in the face of blatant manipulation. But it makes sense. The last surge in gold was due to panic in Euroland. Now that that’s subsiding, the safe haven flow into gold is subsiding as well, especially among European investors.

The truth is, gold and the Euro are always in an inverse relationship, as is true with gold and every currency. It’s just a question of emphasis and leading influence. Not long ago, the dollar exerted more influence.

For a sobering view on the dollar and the state of the US economy, check out this article from the UK:

http://www.telegraph.co.uk/finance/currency/7893238/Feds-volte-face-sends-the-dollar-tumbling.html

What we’ve seen over the past few days are sudden moves up and then down in gold, as if it is caught in a cross-current. My guess is the demand for gold is still strong but the currency influence is caught between the Euro and the dollar.

I am personally worried about gold stocks at present because it looks like equities might be rolling over, possibly into a big drop. Here is one reason for this view:

http://www.gainspainscapital.com/

But the gold stocks have been less volatile than general equities and to some degree have separated from them. So we’ll see. They are taking their cue from gold more than anything these days.

The big question is where does gold head from here? I think we may have hit a peak in the Euro today, precisely at 1.30, as I had speculated a couple weeks ago. If it turns around from here, that could be good for gold.

But the dollar is looking fatally weak so that might not happen. In which case, if the dollar continues to drop, we can hope that gold will start taking its cue from the dollar again. No sign of that recently but maybe a shift is occurring.

Looking at the Yen pairs, it’s clear that risk aversion is rearing its head again. The Euro and pound have not made much progress against the Yen and are at major resistance levels that not long ago were major support levels. So I lean toward the Euro dropping. And maybe that will be good for gold.

We’ll see soon enough.

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