Gold-Euro connection falls every time price makes panics
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Gold-Euro connection falls every time price makes panics
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For those of us watching the Gold markets—that is, those of us anticipating the collapse of the euro and the eventual collapse of the dollar—the last week has been a scary ride: Gold has fallen over 8.6%, from a high of $1,730 on December 7 to around $1,600 on December 20.
The fundamentals would point to gold being a safe haven play—it should not be falling: If anything, it ought to be rising. But a fall of 8.6%? In a week? The first thing that pops into my head is, Don’t Panic!!
The second thing that pops into my head is, this is to be expected—and is only a temporary pullback.
Let’s take the second notion first: The reason the fall in gold is to be expected—and the reason it might well fall further—is because of the euro.
The euro is falling—hard—against the dollar and the other major currencies. Consider the following two charts—the first of the euro over the last three months:
Notice the last few weeks: The euro and gold falling in tandem—just when the euro breaks through its magic resistance levels.
This is not a coincidence.
We have to remember the situation we are currently in. Apart from a sovereign debt crisis, we have a financial crisis in Europe: The banks over there are in terrible shape. No need to go through a list—they are teetering, one and all.
But then so are the American banks.
Because of this, when the euro falls against the major currencies, banks around the world are forced to shore up their capital requirements: The falling euro hits their capital tiers, forcing them to sell off assets in order to cover the hole in their balance sheet.
What commodity or investment has been rising steadily over the past three years? What asset class is the only sure bet against currency collapse?
Gold, obviously—and gold is fungible with any currency, instantly.
Hence what we are seeing—and what we will see again—is major players exiting gold positions in order to cover holes in their balance sheets.
In fact, from here on out, every time there is a big fall in any major currency, we can expect an attendant fall in the price of gold and silver.
Right now, we are seeing this in the eurozone: The euro broke through that magic $1.30 barrier—and Gold fell 8.6%, like a rock.
This is the bad news.
The good news? These falls are technical, predictable,momentary, and so should not be cause for panic—
—rather, they are an opportunity: They are the time to buy.
Why is it a time to buy precious metals? Because the fundamentals of the situation are unchanged: The major countries are over-indebted, with over-leveraged banks teetering on the edge of insolvency. The only solution is for currency devaluation, in order to cut the real cost of these massive loans without causing an outright default or bankruptcy.
Gold and Silver will counteract this currency devaluation. Thus gold and silver are the hedges against what is coming.
However, on the road to currency oblivion, inevitably we will see pullbacks in gold. These pullbacks will be because of two reasons: One is speculators—who are obviously riding the precious metals bandwagon—who will periodically get spooked and decide to cash out their winnings.
The second reason for these jolting pullbacks in precious metals will be because large institutions will need to cover their capital requirements, in the face of the collapse in the currencies.
Such as what is happening now.When this happens, you have to remember two things: One, it is momentary, and two, it is a time to buy.
Think back a year: On December 14, 2010, the London afternoon fix was $1,395. On December 14, 2011 it was $1,600—a $205 rise, corresponding to just shy of 15%.
Has any other asset class risen 15% in a year? Has there been a galloping 15% inflation rate (according to official indices) over the past year? More to the point: Has the European situation been solved? Are the European banks hunky-dory?
To all these questions, the answer is one and the same: No. We are pretty damned far from hunky-dory. And in the absolute bestcase—that is, barring any catastrophic crisis, such as the (likely) break-up of the eurozone—we’ll continue to muddle along, while the central banksters continue their race to the bottom via stealth devaluation.
Thus gold and silver remain as sound an investment in the current macroeconomic climate as ever.
Remember that no investment ever goes up in a straight line—except of course Bernie Madoff’s investment funds. And we all know how that ended.
So to repeat: Don’t Panic!!, and also, this is to be expected—and is temporary......READ MORE
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