Gold Rally and Euro Closely Connected
With the majority of the commodity markets suffering from a metaphorical case of seasonal depression, it’s important to look for the bright spots.
Surprisingly, gold is gaining momentum in the face of a stronger dollar and the threat of higher interest rates in the United States.
In fact, gold is one of the best-performing asset classes so far in 2015. It’s outperformed every major stock index and most international indexes!
Many are wondering if gold is finally starting to react to the global geopolitical turmoil like the majority of other commodities.
But the reason for the gold rally might actually be a dark omen of things to come in the eurozone. Greece is making some new political moves that could destroy the delicate EU economy.
Greece Making Its Escape?
Much of gold’s recent rally began when the Greeks announced new elections. New political powers could mean that Greece may try to exit from the European Monetary Union.
If that happened, confidence in the European monetary system would be shattered, resulting in a panic for the euro.
That, in turn, could lead to inflation and runs on banks if people presumed that the euro was about to fall apart. If the eurozone were to defend the euro, it would have to raise interest rates, which would also stifle any recovery.
The markets are already responding to this prognostication. Some have even called it the second coming of Lehman Brothers…
Thus, it makes sense for those holding euros to begin allocating money to other currencies, like the U.S. dollar, or to currency proxies – like gold.
But I think there’s another reason for gold’s move.
Golden Safety Net
You see, the euro is on a downward trajectory.
More than a dozen years ago, when the euro first emerged, it traded for as low as $0.87 against the U.S. dollar in 2002 – before rocketing up to almost $1.50 per euro. It’s now under $1.20, having fallen more than 10% since August.
The effects of this current price on the EU economy are obvious. During my recent trip to Europe, I was astonished at how the currency was still out of whack in terms of purchasing power.
I wouldn’t be surprised to see the euro trade back to parity, or just below the dollar, in the next 12 to 18 months. It may rise even sooner if the Europeans embark on quantitative easing like the United States did until the middle of last year.
Now, if you look at gold’s performance in terms of euros, it’s even better than in dollars. And by owning gold, euro holders benefit from both a higher price in the metal and a safe haven in the U.S. dollar (the currency gold is traded in).
The XAU Index, which is made up of top-tier gold and silver miners, has rallied more than 10% since December, and that rally looks to continue. Currently at 79, the next resistance level is around 82.
If it breaks through that number and stays above it for a few days, the next level will be 100 – still much less than half the level it reached when gold prices were above $1,800 per ounce.
Stick With the Royals
The biggest winners so far are the gold royalty companies like Franco-Nevada (FNV), which I recommended to you last fall when I wrote that gold was forming a triple bottom around the $1,200-per-ounce level. At the time, FNV was trading for $47 per share, about 13% below where it is today.
That recommendation has not changed.
FNV is a profitable gold royalty company that will perform well during a rally in gold prices and offer a better downside cushion than the miners in the event of a reversal.
Gold has started 2015 like a racehorse out of the gates, and if the euro does indeed falter as a result of quantitative easing, we may see it outperform every other asset class this year!
And “the chase” continues,