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How The Euro Is Driving Gold, The US Dollar, and US Treasury Bonds

For the past and coming weeks, to predict moves in gold and the US Dollar, watch the Euro, for volatility in the Euro is what is driving both gold and the dollar. That’s the asset that is showing the most volatility and markets are watching it, and for good reason. In the past month the EU debt crisis has proven to even the doubters that it is indeed the primary threat to the global economy and banking system, and further deterioration will leave no one unscathed.

The Euro Is The Prime Driver Of Gold Recently

As we discussed in The Must Know Truth About Gold, gold is neither a risk nor safe-haven asset. Its prices are driven by anxiety over the value of fiat currency, which can occur in optimistic times because growth threatens inflation, and also in very pessimistic times, when markets fear for the existence of the financial system and its currency.

Gold’s sole appeal is as a currency hedge. As the second most liquid currency, Euro troubles create plenty of demand for gold.

Note the chart below for the EURUSD, and how the EUR began its most recent move down May 21st.


Now note the below gold chart, and how gold made began its reversal the same day.

Gold Daily Chart Courtesy AVAFX 18 may 27

The only event gold could have been responding to was the renewed drop in the Euro. That makes sense, given that gold is in its essence a currency hedge, so worries about the second most liquid major currency losing value should indeed boost gold.

The Euro Is Also The Prime Driver of the USD

The EURUSD pair comprises 33% of all forex trade by itself. That means for every 3 EUR bought or sold, a USD is involved, and vice versa. Thus these two always exert a major influence on each other, pushing each other in opposite directions like children on a seesaw. That influence has strengthened as events in the EU have taken center stage over the past months. The US has seen mildly improving economic data, but nothing to match the drama of the threatened financial collapse in the EU. As long as jobs growth and inflation remain quiet, the Fed is not raising rates any time soon, so no big market moving news expected from the Fed. Thus the Euro has been the prime driver of the USD as well as of gold.

Thus in the coming days if you want to know where the USD and Gold are likely to be moving, watch the Euro, for it will be moving in the opposite direction.

EU Debt Crisis Is The Prime Driver of All Asset Markets, Including US Treasury Bonds

Note however, that T-Bonds do not generally move together with the price of gold.

I received a comment suggesting that long term US Treasury bonds were a better indicator of inflation than gold, and that thus T-Bond prices should fall and their yields should rise as gold rises. This is a confusion worth addressing, just like that of gold being a risk or safe-haven asset (clarified, I hope, in The Must Know Truth About Gold). 

For the rest of this article, go to How The Euro Is Driving Gold, The US Dollar, and US Treasury Bonds for how the EUR is and is not affecting the US bond market and the investing ramifications of all the above.