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Gold Isn't the Euro - It's the Standard


And it's the only hard currency left for investors.


Gold's action has been particularly interesting this week, and I believe it's very bullish as well.

For example, as the euro sank to a new low on the back of weak Ifo Institue data early Tuesday morning and the dollar index squirted up to a new high for the year, gold sank to as low as $812 in European trading.

I attribute the slide in gold that morning to selling from those who believe gold is just another way play the euro. However (much to this crowd's surprise, I'm sure), gold never even sniffed its $775 August low, even as the euro plunged well below its own August low.

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The early morning commentary predicting gold would collapse if the euro made a new low, which was forwarded to me by a friend, gives you an idea of just how these "the euro and gold are the same" types think:

"Turning to the precious metals, we fear that far too many traders and investors are long of gold, silver et al, and find themselves in a rather awkward position. If the EUR were to trade downward through 1.4600 today, gold shall have a very, very difficult time holding above $800/oz, Indeed we are certain that if 1.4600 is 'given,' $800 will seem like a distant memory. "

The euro indeed did punch through 1.46 to a new 6-month low early Tuesday morning. But rather than collapse "below $800," gold began to rally and proceeded to melt up into the US open, which I'm sure was a shock to anyone who agreed with the commentary above (which no doubt put them in a "rather awkward position" if they were short).

After cutting its losses in half, the yellow metal opened down just $9 in the US and continued to melt up during the US session to as high as $836 (or up about $8), which was a $24 move from its lows during the European trading session.

Click to enlarge

Today, gold is breaking out of a bullish inverted H&S bottom on the charts and trying to climb back above $850 even as the dollar index remains near its high for the year.

This highlights something I have tried to explain before: Gold's bull market isn't just a weak-dollar phenomenon. It's a function of global inflation, just as oil and other commodities' bull markets have been.

That's also why many commodities and gold have been making new all-time highs in all currencies - not just in dollars.

Click to enlarge

Now, turning to today's headlines, we have another interesting tidbit:

The explosive growth in foreign holdings of treasuries at the Fed to record levels between mid-July and early August (foreign holdings exploded $25.6 billion for the week ended Aug 6th to a total of $1.42 trillion, which is a record) made it quite obvious what was done to prop up the dollar during the GSE panic this summer.

An agreement for coordinated intervention among the G7 to prop up the dollar makes it even more clear (i.e. foreign central banks intervened to prop up the US peso back in July).

If foreign central banks are going to be willing to sacrifice the purchasing power of their own currencies in order to prop up the dollar, that makes all the G7 confetti currencies now somewhat suspect. Is it any wonder that gold is now rallying strongly in all the G7 currencies regardless of where the "dollar index" goes?

Note how gold in all the G7 currencies looks virtually identical on the charts below.

Click to enlarge

That's not a coincidence. Gold is a currency, and if the G7 is going to prop up the dollar, it may be the only "hard currency" that investors have left to flee to.

No positions in stocks mentioned.

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