Gold is De-Coupling from the Dollar:Euro Exchange Rate

By Julian D.W. Phillips
Feb 26 2010 11:21AM


www.goldforecaster.com

This is a snippet from the Gold Forecaster. The newsletter that covers all pertinent factors affecting the gold price [with a 95% accuracy rate].-

Further to our piece on the €:$ Exchange rate last issue, we have found that the topic, at last, is hitting mainstream. It is always difficult to be weaned off what you thought was a reliable formula giving you the inside track on the gold price. The oil: gold relationship was a case in point. Many tried to use it as a measure of the next gold price. But in the case of the €:$ exchange rate dictating the direction of gold the consequences of following this line will shortly prove to be very expensive for Traders on COMEX and elsewhere.

As you saw from the chart of the € [Euro] gold price since 2001, and particularly from 2005 [when it was becoming apparent that European Central Banks were faltering in their determination to sell gold] the € price of gold began to rise. But this was nowhere near enough to halt the link of the gold price to the €. Even today short-term moves come about by a move on this rate. This will only slowly diminish as the crises facing both the Eurozone and the U.S. $ increase in severity. We are seeing an acceleration of that now, with Greece’s problems persisting and Spain waiting to enter center stage.

Why did the relationship between the $, the € and the gold price come about?

The $ troubles begin



The € was formed in 1999. Why? The use of the $ in all global transactions became unsatisfactory as the currency of the burgeoning Eurozone and the alternative routs of its own currency became attractive to Europe. Under its wing the currency should have united, at least financially, most of Europe. After all it should have reflected the economy of Europe overall, whereas the U.S. $ reflects the economy of the U.S. [even though it is used in most global transactions] and is irrelevant to that of Europe. So another global trading bloc introduced its currency independent of the $ [bear in mind that the $ was not replaced in Europe, local currencies were], one large enough to set up an alternative measure of value. Since then its value against the $ has moved from 1:1 to 1:1.5 at its worst. This is over 10 years. It does reflect the profligacy of the U.S. currency and highlighted that the U.S. has been paying bills [to the extent of its Trade Deficit] with currency and not goods [only a balanced Trade account would do that]. This is only abnormal when this goes on and on and no effort is made to correct matters, as is the case in the U.S. So it seems fair that a bloc like the Eurozone with a healthy balance of payments should be a good measure of the $. Since then little has been done to rectify matters, hence the steady ongoing decline of the $ against the €.



The € troubles begin

As worries about the parts of the Eurozone grow, the € is losing its reliability as a constant measure of value. When the Eurozone was conceived no room was made for a loss of sovereignty. The Union was united for trade and finance alone. Yes, there is a European Parliament, but national government and national interests will always be preferred to Eurozone interests. The problems facing Greece and in the future Spain, France, et al will mature to bring down the € in time. After all it was the benefits to each nation on the financial front that brought them all together. Becoming like the States, under one government, was not considered. With a rich, productive, efficient North and a poor Tourist-oriented South in the Eurozone, it was only a matter of time before the pressures were felt under one currency. In the past strong currencies revalued and discouraged the flow of capital from poor to rich nations. As the capital left these nations and their internal inefficiencies rose to the surface poor nations began to over-borrow despite the fact that nothing would change in the future. A crisis was in the making. It’s now here and there is a perceptible unwillingness to support each other in all seasons, but only in fair weather, it seems. Trouble is that the pressure will grow under one currency, not diminish.

So why refer to the $:€ exchange rate for the gold price?

The De-coupling Gold Price

As you can see there never was a good case for the link of the € to the gold price. But it has taken the internal national problems within the zone to knock confidence in the €, for this to become visible. Looking ahead, it would seem that the Eurozone problems will not go away until there is a mechanism for leveling the playing fields between rich North and poor South. Don’t think for one moment that the rich will give handouts to their poor brothers in the South to achieve this on an on-going basis. The Southern nations are breaking Eurozone entry rules and must pay the penalty! How can the € bear up under these “fixed currencyâ€