In a market report published today I discussed a series of erroneous news leaks that have misled financial markets recently around the dollar/euro trade. The same issues have influenced the price of gold in dollar terms. Thus, the case for gold made recently by the bid is based on a false premise and should correct.
The 5-day chart of the SPDR Gold Trust (NYSE: GLD) shows it has gained ground over the last two trading days. However, I think investors had better pay closer attention to the direction of the last five days. Yesterday, we heard from an unnamed French government representative that President Obama didn't fancy a strong dollar. Well, that was news to everyone who has ever heard any president of the United States mention the dollar. They usually respond like robots regarding favor of dollar strength. It's almost unpatriotic to say anything different. So, I was not surprised when the president, during his post G7 meeting news conference, said not to listen to quotes from unnamed sources and flatly denied the statement.
News of this sort has emanated out of every corner of Europe over the past several weeks, and I covered 5 items in this report published this morning about the dollar and markets. What I think we are seeing are blatant attempts by desperate and biased parties to maintain stability of European financial markets. Judging by the one-month chart of the iShares Europe ETF (NYSE: IEV) there might be some good cause for concern.
The 1-Year Chart of the CurrencyShares Euro Trust (NYSE: FXE) tells the same store perhaps more clearly. The FXE illustrates the devaluation of the euro over the last year versus the dollar, as European economic softness has coincided with recovery in the U.S., and as the ECB and US Fed have differed in their monetary policy plans. More recently, unless you've been living under a rock you know that elections in Greece brought new concern of a severe disruption to the eurozone.
Over the past couple days, the IEV and shares across Europe have begun to reflect the fact that the Greece issue is approaching the midnight hour with no resolution really in sight. So suddenly, when we should see the euro weakening toward its previous lows approaching parity with the dollar, curious news items and leaks of information have misled market participants. Again, some of those can be seen in my market report today.
These false promises have effectively propped up the euro, but the props are about to fail in my opinion. The truth cannot be smothered for long. Recently we have been told that a strong dollar troubles the president of the United States, but we know that no president has ever favored a weak dollar. We have been told that Greece was discussing a bailout extension that would give it capital through March of next year. But we know that Greece is stubbornly holding to its anti-austerity demands while threatening to leave the eurozone otherwise. We've been told that the wise IMF can influence the U.S. Federal Reserve and cause the U.S. central bank to push aside its mandates for full employment and moderate inflation for the U.S. in order to preserve global order. Yet, we know that European economies had recently shown economic strength and that the U.S. labor market has not seemed as healthy as it is now since before the financial crisis.
So, despite gold's gains and the rise of the GLD by 0.3% yesterday and its inclination in the pre-market today toward higher ground, I suggest investors take heed of the fact that gold, like the euro, is trading on false promises. In fact, the more ground it gains on poor premise, the more likely it is to come crashing down, as I recently suggested it might.
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