There’s no question that the potential destruction of the euro has moved from the realm of "Black Swan" event to a serious possibility. Some of chosen to read broader implications into this, suggesting that this is the beginning of the end of all fiat currency systems. For a variety of reasons which I’ve discussed before, I don’t think one can make the leap of logic in regard to the latter point. It seems to me that the problems afflicting the euro zone are tied pretty specifically to the problems inherent in the structure of the European Monetary Union.
To be sure, a breakup of the euro zone is possible, although I suspect we’ll see more of the kinds of political fudges established earlier this week to ensure that the EMU limps along for a while. Granted, if I’m wrong, and the euro vaporises, we could well see gold explode on a major flight to safety move. But that’s not my baseline scenario here.
Gold/Euro is as high over its moving averages as gold was at any time during the latter years (1976-80) except for the gold blow off that began in late 1979.
Unless we are in the equivalent of late 1979 and it feels like we are far from there at this juncture, then either the Euro is ready for a big rally or gold is ready for a big decline or a combination of those events.
Of course there is another 3-5% that could happen so not trying to call this day to day but it does feel like February, 2009 one month before the low in equities that was made on March 9, 2009. We are in the 9th inning of Gold/Euro. My sense is that it will be gold that goes down more but euro could rally if things stabilise for a while.
I stress that this is a short term tactical call. I still think the euro could well go to parity against the dollar, for all of the reasons that Rob Parenteau has cited, but like Rob, I think we’re got a profound problem in the euro banking system, which is deflationary at the core and might create some problems in the precious metals complex. We’ll see.
I realise the technicals look good, but I suspect its because analysts look at gold relative to overbought in dollars but not so much Euros.