Whether Gold Is Still A Safer Bet Than The Dollar

Includes: GLD, IAU, UDN, UUP
by: Carlos X. Alexandre

A couple of weeks ago I posted the article “Gold's Bet Is On Euro's Demise, Not Just Instability,” and left a simple observation.

I know that for some there’s no comparison between the metal and paper money, but despite personal feelings and theories, the question is whether the investment community will see gold as a safer investment than the dollar. Capital flows will paint the final picture, and I have observed gold’s price over the last few days finding resistance as the dollar entered a well defined positive trend. Markets talk and I listen.

Since then the dollar has appreciated 2.8% as measured by the Dollar Index, and gold depreciated 3.8% during the same period. Meanwhile, a rainbow of news regarding the eurozone has provided enough fuel to move every asset in every possible direction, and I’ve kept a close eye on the inverse correlation between the greenback and the yellow metal.

As a matter of fact, the relationship between the dollar and gold had been lost, and the most plausible conclusion was that gold was preempting the forward chaos caused by the demise of the euro.

But it appears that even with the extreme difficulties that Europe is facing, the euro is not likely to vanish overnight, if it disappears at all. It certainly has weakened as the debt crisis keeps unfolding and investors continue to lose trust in the institutions behind the currency.

As of late, and as examples, large corporations are conducting their own small scale “run-on-banks” with regard to euro denominated accounts, while the Bank of China halted foreign exchange swaps with some French banks.

But back to the topic at hand, and thus far capital flows are favoring the dollar over gold in this time of uncertainty, and the instability in Europe is not providing enough impetus to keep the metal on the front burner. Without a doubt, sentiment could change tomorrow, but calling gold a "safe haven" cannot be taken for granted, and if the inverse correlation reestablishes itself beyond a few weeks, the risk for gold assets increases as well.

Lastly, this is not just a dollar/euro story, and commodity-driven currencies as measured by the futures markets have lost considerable ground since late July, with the Canadian dollar closing yesterday below parity at $0.9949 and a loss of 6.3%, while the Australian dollar is slightly above parity at $1.0024, and down 8.8%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.