There is a golden lining in the cloud over Europe

trade precious metals with eToro The news articles about the European debt crisis are beginning to disappear from front-page headlines, but the reverberations are still being felt in markets around the globe. The lesson is simple. A crisis is the most basic of fundamentals. Their occurrence is unpredictable, but their impacts, at times, can be enormous, quickly displacing any previous forecasts about market direction. This crisis was no different. The Dollar and Yen pounded the Euro. Wheat futures plummeted on the exchanges in Chicago, and yes, there was the inevitable flight of capital to safe havens, the primary beneficiaries being precious metals, primarily Gold. The “golden” lining in Europe’s debt cloud has been just that, Gold. Gold had just come off of a record year in 2009 as it road its familiar growth path set by a weakening Dollar. Currency charts for the EUR/USD pair tell the story quite well in vivid detail. Conversely, it could also be said that Gold was following a strengthening Euro until that correlation broke down in February as seen below:

gold/euro correlation

The real demarcation in the two curves began in February when initial news reports about the problems in Greece began to surface. More importantly, Gold has continued its upward move as the Dollar was strengthening in 2010, a break from past trends that confirms the true value proposition of the metal. Some analysts view these moves as tied to capital flight and speculation, but others are quick to remind us that investors prefer intrinsic value to the sometimes suspect relative value of paper money. There are several reasons why investors frequently buy Gold. Intrinsic value, a safe haven, and a weakening Dollar account for three of these and were touched on above. Gold also responds to supply and demand forces since the amount of Gold in production is declining. Lesser supply equates to higher prices. Kids in high school understand that math. Stock portfolio managers have also discovered that ownership in Gold can diversify the risk inherent in their stock portfolios, protect the wealth therein, and improve performance when markets move against equities. Lastly, Gold is an excellent hedge against inflation. The price of Gold has always been “married” to inflation. When inflation rises, so does the price of Gold. Gold is presently achieving record highs against the Dollar, and most analysts expect a small correction is in the offing. However, a number of factors are aligning in today’s global economy to suggest that any hedge against inflation will be in hot demand in the not too distant future. Economic recoveries take time. Despite the recent market turmoil and with U.S. budget deficits appearing to be insurmountable, the long-term fundamentals for the Dollar are anything but optimistic. Central Bank interest rates in the world’s primary markets are still near zero. The will to raise those rates once the inevitable inflation heats up will be conflicted by fears of bringing back the recession that just receded. A weak Dollar, tied back to massive deficits, will keep commodity prices high and strong. The stars are lining up for a perfect inflationary storm, and Gold will be the perfect ark to withstand the rain showers threatening on the horizon. Unlike other commodities, companies do not produce the yellow metal primarily for a consumption market. Gold bullion, bars and coins bought for investment confirm this fact. It has always been treasured as a store of value, particularly when economic times are tight, it does not tarnish or corrode, and quality of value is not an issue. Gold mined in the days of King Tut has the same quality today as Gold delivered from the mines in South Africa or from Canada for that matter. Gold is definitely the finest of all the precious metals.

Recent economic events have reinforced the value proposition of Gold from several vantage points. As the global recession abates and economies regain strength, conventional wisdom says the signs of inflationary pressures yet to be realized are already on the wall. As always, Gold offers the best hedge against inflation. Prudent investors aware of this maxim will not waste time debating the issue.

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