With the European
sovereign-debt troubles dominating financial news, the euro has taken quite a
beating lately. The majority consensus opinion even believes that the
euro’s very existence is threatened by this crisis. This
pervasive euro-bearish psychology has ignited euro gold, which is now
challenging the fabled €1000 level.
These
all-time-record euro-gold highs are very exciting, sparking global interest
in investing in gold. Just like we Americans view gold through our own
US dollar lens, investors around the world think of it in terms of their own
local currencies. And for the 325m Europeans as well as the 175m more
people living in other countries with currencies pegged to the euro, euro
gold’s progress defines this secular gold bull.
And for American
investors, euro gold is very important too. Why? Think of euro
gold as dollar-neutral gold. For the initial 4 years of
today’s gold bull, gold was essentially only climbing in dollar
terms. It was reflecting the US dollar’s secular bear, but
still largely flat in other currencies. Euro gold revealed this
extra-dollar reality, and continues to do so today. It tends to filter
out the dollar’s influence from gold.
The venerable US
Dollar Index is today’s premier metric for tracking the dollar.
And the euro utterly dominates this 37-year-old construct at 57.6% of its
weight. Thus the euro generally moves in lockstep opposition to the
dollar and vice versa. So when gold rises in dollar terms, it could
just be a response to Washington’s
continuing dollar devaluation. But when it rises in euro terms, it is
really rallying globally independent of the dollar’s machinations.
A couple months
ago when euro gold was down near €834 per troy ounce, I wrote an essay about those new
record highs. I pointed out that euro gold was not far from €1000
in percentage terms. And a decisive breakout above these levels would
likely spur big new gold investment demand, much like last autumn’s dollar gold breakout above
$1000 did. Investors chase proven performance and always get excited
about big round numbers, so €1000 is a very important psychological
level.
On a side note, a
few European investors have told me they consider gold priced in grams, not
troy ounces, so €1000 is irrelevant. But most Europeans
I’ve heard from think of gold in ounces because the global gold markets
are primarily priced in US dollars. Not to mention the US
is where most of the world’s capital invested in gold is domiciled, and
the great majority of gold commentary and analysis originates in the
States. And the popular national coins favored by European investors
are in one-ounce denominations. So even in Europe’s
metric world, €1000 is a major psychological benchmark.
And gold’s
recent surge that is challenging €1000 for the first time in history
has been lightning-fast. As recently as early April, euro gold had
never even exceeded €835. In 2009 and 2008 it averaged €698
and €593 respectively. Between its latest interim low in
mid-March (€801) and this week, euro gold has soared a breathtaking
22.5% at best. This is a huge move in just 8 weeks, so euro gold
is definitely overbought.
When dollar gold
first challenged $1000 back in March 2008, it too had just rocketed higher in
a fast rally. Yet it wouldn’t ultimately break through decisively
until 18 months later in September 2009. Is euro gold fated for a
similar high consolidation today? Or can it break through €1000
soon without looking back? Technicals generally argue for the former,
while surging investment demand could still bring about the latter.
This first chart
puts the recent euro-gold surge in context. Euro gold is rendered in
blue, per troy ounce of course, superimposed over the euro’s exchange
rate with the dollar in light red. While euro gold is certainly high
today, its ascent doesn’t look too parabolic over this time span.
Euro gold has actually seen similar fast rallies in the past. And
although they corrected, euro gold continued marching higher on balance.
In late 2008
during that epic stock panic, euro gold blasted 26.3% higher in just 4 weeks
before peaking near €673. In early 2009 when a major US
hedge fund was taking a huge stake in the GLD gold ETF, euro
gold shot 28.0% higher in just 5 weeks before hitting an apex near
€785. And in late 2009 before the Greek debt crisis became
news, euro gold surged 19.7% in 9 weeks and ultimately hit €808.
So within the
context of this recent precedent, euro gold’s sharp 22.5% rally in 8
weeks is not wildly excessive. If you average these earlier fast
spikes, they rallied 24.7% over 6 weeks. Not only is today’s
rally smaller over a longer duration at this point, but it isn’t even
close to being parabolic. Dollar gold’s infamous late-1979
parabolic blowoff rocketed 128% higher in just under 11 weeks! So 20%
to 30% in 8 to 10 weeks isn’t even in the same league as classic
bull-ending parabolas.
Nevertheless,
euro gold is definitely overbought technically at today’s levels.
Its recent surge drove it far above its uptrend’s resistance line into
a technical no man’s land. And at this week’s high, it was
trading 1.28x above its key 200-day moving average. At Zeal our Relativity-based dollar-gold overbought signal triggers
at 1.25x. Whenever dollar gold moves up fast enough to stretch 25%+
beyond its 200dma, the probabilities overwhelmingly favor an imminent
correction. While I haven’t done any euro-gold Relativity
studies, it wouldn’t surprise me one bit if it acts similarly to dollar
gold at short-term extremes.
Also arguing
against €1000 holding in this very first attempt, note the plummeting
euro above. As global investors’ euro fears reached a fever pitch
in recent weeks, the euro has just collapsed. Trading near $1.37 per
euro as recently as mid-April, the beleaguered euro swooned as low as $1.26
last week. A 7.6% plunge in the world’s second-most-important
fiat currency in just 3 weeks is ridiculously fast. Odds are such a
move will not prove sustainable.
While it is
incredibly fashionable to hate the euro these days, traders have to realize
psychology affects currencies just like it does stocks. Extreme fear is
feeding this euro-to-zero craze, and extreme fear is never sustainable.
Remember back in March 2009 when the S&P 500 was trading under 700 and
the whole financial world feared a new depression? Stocks were wildly oversold and
couldn’t stay at such depressed levels. Even though
seemingly-logical fundamental arguments were advanced to try and justify
the stock markets’ low levels, in reality it was pure emotion.
As a whole,
investors and speculators are never right at extremes. They are
the most scared right when prices are the lowest and they should be eagerly
buying. And they are the most greedy right when prices are the highest
and they should be selling. It is very easy to get caught up in the
rampant fear at major lows and popular greed at major highs. This is
just human nature, the herd mentality. Only the most diligent traders
and students of the markets can purge themselves of these destructive
tendencies.
Seeing the euro
near its stock-panic lows today looks like one of the best contrarian buying
opportunities I have ever seen. Everyone fears the euro, and
blood is literally running in the streets. As Warren Buffett says, the
time to be brave is when everyone else is afraid. So I expect a wild
euro rally once these irrational sovereign-debt fears pass, as they
inevitably will. I say irrational because Greece represents less
than 3% of Europe’s GDP and all the troubled countries together only
make up a small fraction. Out-of-control emotions have made this whole
episode a mountain out of a molehill.
And if the euro
rebounds to $1.35 to $1.40, merely 7% to 11% rallies from this week’s
levels, euro gold will face some serious pressure. While the US
dollar’s global dominance is waning thanks to Washington’s insane
spending and endless money printing, gold is still primarily priced in
dollars. So gold priced in other currencies, including the euro, is a
function of any currency’s exchange rate with the dollar and the
dollar-gold price.
At a $1.35 euro
and $1200 gold, euro gold would be trading near €889. At $1250
this rises to €926. And the higher the euro recovers relative to
the dollar, the lower euro gold goes. At $1.40, $1200 and $1250 equate
to €857 and €893. So more than anything else, even the
overbought euro-gold technicals, I suspect the high odds for a sharp euro
rebound rally will keep euro gold from easily hanging out above €1000
on this initial attempt. Radically-oversold anythings, including
currencies, tend to bounce fast.
So I doubt
€1000 will hold for long given the current depressed euro
environment. Still, there is one major wildcard that could make it
so. Gold investment demand. Ultimately global investment demand
drives the gold price. And here in the States, investors are starting
to get excited about gold again as it easily holds above $1200. Nothing
begets new investment demand like record-high prices, so new capital is
flowing into gold and should continue to flow into it. American
stock-investor demand for GLD alone has been staggering.
If investors here
in the US and around the world continue to pour capital into gold investment,
dollar gold could shoot high enough in the near term to offset a
rallying euro’s retarding impact on euro gold. If dollar gold
hits $1350 or $1400 soon, which really isn’t as stretched as it sounds
given this is just 9% to 13% higher than this week’s prices, euro gold
could stay at €1000 at a $1.35 or $1.40 euro respectively. I
certainly wouldn’t bet on this possibility, as its odds are far lower
than euro gold simply retreating. Nevertheless, it is still a potential
scenario to consider.
But whether euro
gold breaks decisively over €1000 and holds it today or next year is
really irrelevant in the grand scheme of this secular gold bull. Sooner
or later it will happen, there is no doubt at all. The second
time euro gold approaches €1000, it won’t be so overextended
technically and will have a higher technical and psychological base to launch
from. I doubt it will take 18 months like dollar gold did from its
initial $1000 attempt to its successful breakout. €1000+ will
probably become the new norm this autumn.
This secular gold
bull, driven by powerfully-bullish fundamentals, is a
global phenomenon. Investors’ innate love for gold, and for bull
markets, transcends borders. The higher gold climbs worldwide, the more
investors who have yet to invest in it decide to join the party. And
existing investors deploy more capital into this winner. The net result
is gold powering higher on balance in all currencies, including the euro as
this long-term euro-gold chart reveals.
Euro gold
didn’t start running significantly higher until today’s gold bull
entered Stage Two,
where global investment demand replaced the US dollar bear as gold’s
dominant driver. Provocatively the event that marked this transition
was the euro-gold breakout above
€350 back in June 2005. After that, it was off to the races for
euro gold. And we’ve seen four major Stage Two uplegs since,
along with a gradually-accelerating trajectory revealed by ascending support
lines.
And euro gold has
powered higher since mid-2005 despite the strong euro. While the
US dollar has long been in a secular bear, the euro has been in a secular
bull. Back in mid-2001 a single euro was only worth less than
$0.84. Then, like today, American analysts had a field day forecasting
the imminent demise of the euro currency. How could so many disparate
nations, with their own agendas, keep their monetary and political union from
splintering? Believe me, the euro-to-zero trade is nothing new.
But somehow,
Europe did hold together through all kinds of crises. Its
currency grew stronger and stronger in the face of the relentlessly weakening
dollar. By April 2008 as the US dollar hit an all-time low, the
euro had powered up to almost $1.60. Despite this massive 90.9% bull
market in the euro, a strong currency by any standard, euro gold still
continued to climb on gold investment demand. To the very days of the
euro’s best bull-to-date gains, euro gold still rallied 80.2%.
Gold’s bull transcends all currencies!
So even if the
secular euro bull persists, euro gold will continue powering higher on
balance. Like all bull markets it will flow and ebb, seeing fast and
exciting uplegs followed by necessary and healthy corrections to rebalance
sentiment. So if €1000 doesn’t stick soon, it is only a
matter of time until it will. For those naysayers today who claim
€1000 will never hold, realize the same was once said about €500
and €750. And while neither held on their first attempts, it was
only a matter of months until each stuck.
It’s not
that the euro is a great currency, it is another devaluing fiat-currency
scheme just like the US dollar. But unlike the profligate US Fed and
Treasury, the European Central Bank is fairly conservative. It runs
higher interest rates than the US, making the euro more attractive to global
investors. It grows its broad money supply at slower rates than the US
does. And the world’s central banks and investors are way
overexposed in dollars, so they need to diversify into euros and physical
gold bullion. The euro isn’t fantastic, but its fundamentals are
superior to the US dollar’s. It is the lesser of two evils.
So as we’ve
witnessed for years now, both the euro and gold are destined to continue
powering higher in their independent secular bulls. And far more than
Americans, European investors who remember their continent’s war-torn
history (and failed paper-money schemes) have a strong cultural affinity for
gold. So the higher euro gold goes, the more capital Europeans will
deploy in it. Of course this creates a self-feeding virtuous circle,
higher prices begetting more investment which drives higher prices.
At Zeal
we’ve been studying and writing about this critical euro-gold bull
since even before the
€350 breakout. Our subscribers learn about big moves in gold before
they happen, when they can still deploy capital in cheap gold stocks to
leverage these upcoming uplegs. We are heavily deployed in gold and
silver stocks today, riding this spring gold rally which I’ve been
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The bottom line
is euro-gold €1000 is a very important psychological milestone in this
global gold bull. Just as $1000+ did here in the States last autumn,
€1000+ will make gold far more appealing to legions of European
investors. Their buying will drive gold even higher. So to see
€1000 challenged this week for the first time ever, even if it doesn’t
hold, is very exciting. Gold history is being made before our eyes.
While
probabilities favor the super-oversold euro bouncing and scuttling this
initial €1000 attempt, it is only a matter of time until this level
holds for good. Euro gold has powered higher on balance for years
despite the simultaneous strong bull market in the euro. While it
isn’t as bad as the dollar, ultimately the euro is just another
devaluing fiat currency that investors can help protect themselves from by owning
gold.
Adam Hamilton,
CPA
Zealllc.com
April 23, 2010
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