Do gold and the Euro move in sync? Not according to the Gold Price in Euros [1]...

IN THEIR SEARCH for a reliable formula to satisfy the scientific and mathematical belief that market relationships are precisely measurable, most financial investors right now believe that gold is responding in an opposite way to the US Dollaer.

   The corollary to that, therefore, is that gold must be moving in synch with the Euros. But in fact, the Gold Price in Euros [2] has been rising strongly, hitting an all-time high above €630 per ounce on January 29th.

   So it is important to look a little more closely at this formula and the realities behind it.

Gold vs. the Euro: The Eurozone's Problems

   The Eurozone is relatively self-sufficient in monetary policy, as can be seen from the actions of the European Central Bank officials. They claim they are acting against inflation rather than tending to growth, unlike officials at the Federal Reserve in the United States.

   But are they? Would Europe be able to stave off a recession if the US were really suffering? More to the point, would they be able to retain growth if the Dollar fell against the Euro? A really strong Euro would savage European competitiveness over time, so Europe cannot afford to see the single currency become too strong and remain healthy.

   The cheapening US competition, gaining ground as the Dollar fell, would eat into European exports and force Europe either to begin to fragment economically or to retaliate.

   Last week saw the Dollar head down yet again as the interest-rate benefits of the US currency proved less attractive than those of the Euro. But then we saw the Dollar suddenly recover way beyond a level justified by the fundamentals. Clearly, global players that want to see the Dollar hold value moved into the market and drove it back up, despite the deeper trend.

   And then, after the Fed dropped its key interest rate – the Fed Funds rate – by another 0.5%, the Dollar sank by another one per cent on the currency market.

   If theory were dominant, the European economy would now be set to turn down and follow the States into recession on the back of the ever-stronger Euro. But here at the Gold Forecaster [3], 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 Euro. The second is to stimulate growth and place "price stability" on the back burner. The resulting lifting of inflation will be a price that French, German and Italian households simply have to pay. Because if price stability leads to falling growth and a recession in Euroland, then we can expect to see the Euro de-couple from the Dollar 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?

Gold vs. the Euro: What Can the Fed do for Europe?

   Can Europe benefit from the stimuli that the Fed and Bush administrations are pumping into the US economy? Yes, provided they are not disqualified by a strong Euro. So expect the Euro to further 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 Euro and the Dollar 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.

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

   Gold Bullion [4] on the other hand – and 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 Euro 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 Gold Market [5] sees that and takes gold up and away from it.