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
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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.
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