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Is
the Euro as good as gold again, or is gold investing only as good as the Euro...?
SO "HEDGE FUNDS
find ways to trade Euro misery," according to a Reuters headline. And
with no hint of irony, the newswire includes gold in its list.
Haw! "Greenlight Capital's David Einhorn recently said he is bullish on gold and gold
miners, in part because of concern about the fallout from a Eurozone
meltdown," Reuters goes on. Yet the Eurozone meltdown, to
date, has done nothing for gold investing
but show it up as a failed "safe haven" – a has-been,
a fraud, a charlatan.
Today's drop back through $1560 per ounce came precisely as the single
currency sank through $1.24 on the foreign exchange market. So is the Euro as
good as gold, or is gold investing in fact only as "good" as the Euro?
Our chart shows the gold price
in Euros, and
before that in Deutsche Marks, compared against the price in US Dollars. Both
are converted into an index, starting at 100 in June 1968, when the daily Frankfurt
gold fix began as a benchmark for Germany's hard-money savers.
And as you can see,
the metal has been far more volatile in the greenback than in its European
competitor. But no doubt German investors still appreciated the 7-fold gain
of the 1970s.
"Until gold broke above the €350 per ounce barrier that had
contained it for four years," wrote John Hathaway at Tocqueville Asset
Management in
mid-2006,
"conventional wisdom held that the currency was a superior way to hedge
Dollar weakness because it had both yield and liquidity in its favor."
Calling the Eurozone's 2005 relaxation of its Stability Pact rules on debt
and deficits "good news for gold", and noting gold's clear break upwards
through that €350 level, Hathaway said gold was already suffering a different
"identity crisis", then being mistaken for just another commodity
rising on the tide of Asian growth.
Fast forward to mid-2012, and gold has clearly
broken away from that disguise in turn, doubling in terms of the CRB
commodities index since the financial crisis began. Yet here it is again,
unnerving both US and British investors by putting on a funny accent and
waving its arms wildly. Not even Eurozone savers are choosing gold investing above "safe haven" government bonds. Meaning
the government bonds of Germany, however. Not the government bonds of Spain
or Italy. Because unlike gold, not all Euro debt is created equal –
fungible, incorruptible, and tightly supplied by nature itself.
That lack of consistency is in fact the big problem, forcing debt costs
higher for Madrid and Rome, just as it did for Athens, Lisbon and Dublin.
Because domestic banks, pension and insurance funds are legally bound to
avoid foreign exchange risk by only buying assets denominated in their
domestic currency. Yet today, and thanks to the Euro, that means Spanish
banks can join the rush to bid up German Bunds...leaving Madrid without a
forced buyer, as used to happen in recession.
The real identity crisis, meantime, doesn't lie in the gold market. Instead,
it lies in the Euro – which is either the Deutsche Mark or the Drachma,
but cannot be both. Applying the fiscal policy of the former but the monetary
style of the latter has got Europe to this happy pass.
Let's see how gold performs as the crisis makes Brussels and Frankfurt jump
one way or the other – together or separately.
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