In our webinar last week, we showed a chart comparing gold and the US dollar index, as you can see below (click to enlarge images):
We said what is interesting about this chart is the fact gold and the US dollar have moved in a positive correlation lately. We’ve highlighted the area on the chart roughly where you can see the two price series started moving together. This isn’t usually the case, as you well know.
In fact, we usually see a very tight negative correlation, i.e. gold strength and dollar weakness and vice versa. That makes some economic sense, because as gold is priced in dollars, and gold must maintain global purchasing power as an international standard, a fall in the value of the dollar should coincide with a rise in the value of gold. But now, they are trending together. What has changed?
We think the rising eurozone risk is what has changed this picture. The chart we didn’t show in our webinar yesterday was the one below, and it’s quite interesting and we think it is more supporting evidence for our thesis that sooner or later the euro will break down again, in a very big way.
Gold (red) versus Ireland-German 10-yr bond spread (black): This is a tight positive correlation which shows rising risk, evidenced by rising spreads, translates into higher and higher gold prices.
If you are a big euro investor, and you don’t like the dollar (for a lot of very good reasons) gold seems the proper hiding place. Of course one other hiding place is being sought along with gold, and that is the Swiss franc.
What we’ve done in the next chart below is overlay Swiss franc – USD (green) on top of the chart above—gold and Ireland-German 10 yr bond spread. It seems to be one big happy family of correlation…
So, it seems the safe havens—gold, Swiss franc, and the US dollar (yes a safe haven only because of its world reserve currency status)—are all pointing to rising risk of another eurozone crisis waiting to happen.
If you think the eurozone gets in trouble again, you know where to hide. If you think all is good, no more crisis in the eurozone, you know what to do ... buy EURCHF with both hands and feet.
EUR-Swiss franc weekly: Recent all-time low in this pair…
For now, we sit squarely on the fence, pecking away at seeming near-term opportunities. But, if yield spreads continue to blow out in Europe, a new big trend lower in the euro will likely resume and gold will likely make my esteemed father-in-law a very happy man.
The SPDR Gold Trust (symbol GLD) is an ETF that makes it easy to play the price fluctuations in gold without delving into the futures market. Perhaps a consolidation is in order as gold challenges its all-time highs; either way a blast through resistance looks to be in order.
Additionally, if Soverign Default in Europe reignites the risks to the eurozone banking system, as discussed today and more in-depth in yesterday's post, then the easiest way to play it outside the FX market would be through the ProShares UltraShort Euro Fund (symbol EUO), an ETF that gives investors to 2x leverage and allows them to essentially be "short" the euro without having to "sell short" a security.
Disclosure: Author is long EUO