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« Inside Story: Gold, Trust, And The Federal Reserve - The Video Documentary | Main | Only One Thing Matters For Gold Prices: There is No More QE »

Possible Devaluation Of The Euro Casts A Shadow Over Gold’s Future


As the European Union struggles with rising unemployment they now have to face a future of increased competition from the Japanese as they actively devalue the Yen. The new government in Japan, under the Premiership of Shinzo Abe, has managed to devalue the Yen by round 20% so far. In the short term this devaluation should boost Japanese exports as their goods are available at a substantial discount. This action mirrors that of the United States as they continue with their programme of Quantitative Easing. The United Kingdom has also joined in this ‘race to the bottom’ and has managed to reduce the value the British Pound.

The European Central Bank (ECB), under the guidance of Mario Draghi, cut interest rates to a new record low in May and said it would act again if necessary. However, in this tit for tat, cut for cut environment, the ball appears to be back in ECBs court. A money printing strategy may not appeal to Jens Weidmann, President of the German Bundesbank, however, the German car makers may think otherwise given the cheaper competition from Japan. Devaluation would also appeal to the other members of the union as they would see such a move as a boost for their beleaguered economies.

Devaluation of the Euro

Now let’s assume that the ECB decide to print enough Euros to match the fall in the value of the Yen, devaluation in the order of 20%. It then follows that this move would have a knock-on effect on the value of all of the other currencies including the US Dollar. As the Euro falls the value of the dollar would rise in terms of the US$ Index.

The dollar index weights each currency as follows: 

Euro (EUR) 57.6%
Yen (JPY) 13.6%
Pound (GBP) 11.9%
Dollar (CAD) 9.1%
Krona (SEK) 4.2%
Franc (CHF) 3.6%.

So we can see that any movement in the Euro will have a major effect on the dollar. If a devaluation of 20% was achieved, then, not putting too fine a point on it, we have a drop in the value of this basket of currencies of about 10%, or an increase in the value of the dollar of about 10%. The dollar current stands at 83.57 so it would rise to about 92 on the Dollar Index.

Effect on Gold Prices in Dollar terms

So what does this mean for gold bugs? Gold has an inverse relationship with the dollar, so in dollar terms gold prices could drop by 10%, which would take today’s price of $1400/oz down to $1260/oz. We are aware of the myriad of factors that we are not taking into account in this exercise, but we believe that the currency war deserves to be given a high priority in any investment considerations.


Recognition of this possibility does not mean that the bull market in precious metals is over, but it may present us with an opportunity to generate a profit while we are waiting for the rally to resume.

If ECB do decide to print their way out of trouble then a trader could look to position themselves on the ‘short’ side of gold in order to take advantage of the fall in gold prices. There are a number of ways to do this including but not limited to: shorting some of the weaker mining stocks, buying put options on the weaker mining stocks and/or the gold ETFs, buying Put spreads with the view to profiting as metals prices suffer from price decay.

I’m not suggesting for one minute that you sell your physical gold or silver, but you could consider deploying some of your ‘opportunity cash’ in the short term. This sort of trading could also act as an insurance policy for your precious metals portfolio, should gold fall further.

Other considerations are the summer doldrums, a lackluster period for the precious metals sector, so our expectation is for further weakness. There are also the NFP jobs numbers out on Friday and if they are anywhere near reasonable there will be more talk of tapering QE, which tends to put a cap on gold’s progress.

Like all gold bugs we await the resumption of the bull market, but this phase of trending down has to come to a halt before we can take a bullish stance and hit the acquisition trail.

As bulls we can wait and hope for this period of consolidation to come to an end or we can recognize it for what it is; an opportunity to trade on the ‘short’ side. As retail investors we are small enough and therefore nimble enough to adapt our trading strategy to suit the changing risk/reward environment and make it work for us.

This strategy is helping us to generate cash and place us in a good position financially at a time when the gold and silver market is looking more than a tad gloomy.

It’s important that we do not close our minds to alternative strategies just because gold and silver prices have performed so well in the past. This is a correction, an opportunity, so use it to your advantage. Trading on the ‘short’ side does not mean that you are a bear on precious metals; it means that you have recognized a short term trend and as they say; the trend is your friend.

Now get out of bed earlier and do the work.

With gold, silver and Uranium stocks being out of favor one must decide if this is a problem or an opportunity. We have steadfastly refused to buy gold and silver mining stocks for the last two years and as evidenced by the HUI we feel that our decision to hold back has been vindicated. The damage done to the mining sector may not be over yet but this demise is starting to offer up some exciting opportunities in my view.

Great care will be needed in the selection process in order to generate a reasonable profit and that’s where our new venture begins. ‘Stock Trader’ has begun trading on behalf of ourselves and our much valued subscribers, all exciting stuff which we are really looking forward to, if you wish to join us then please subscribe below;

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Reader Comments (4)

Now THAT's a well-reasoned argument. Not sure I buy it, but it's well reasoned.

2 big ifs. If the Eurocrats devalue and if gold runs inverse to the movement of the dollar, this would be a good play.

Personally, I never fool with bullish trades when valuations are stretched so far into overbought territory or bearish trades when there's a firesale in progress. Sometime cheap is cheap enough, but I get that traders may want to.

Will Draghi and the Euroslime devalue? Not unlikely given the current Japanese advantage. It is a full on race to the bottom.

The premise I would be more skeptical of is that "gold has an inverse relationship to the dollar."

It sure does...most of the time. But not always. Sometimes they move together. I suspect it would, indeed, move inversely if the catalyst for the dollar's rise is Euro weakness. That said, please note one very salient fact:

The dollar is exactly where it was in June of 2008. During that same 5 year period, gold has gone from $875ish to $1,400 and that's after slumping $500 over nearly 2 years and becoming seriously oversold.

So, yeah, beware a rising dollar if you're a trader, but I'd ignore any temporary rises if I were simply interested in holding real money. In a currency war, no country can afford to be left behind in the race to devalue. The US will catch up if the Euros surge ahead. That's why any talk of an elimination or even a easing off of QE is preposterous. A truly strong dollar relative to yen and Euro will utterly collapse the US economy and decimate markets. The Fed knows this. The White House knows this. Obama's stated goal is to double exports. Can't do that with a rising currency. They will continue to conjure new currency units with abandon.

It's a Ponzi world. Gotta keep piling more and more paper on the bonfire or it will extinguish itself.

To my mind, the thing to be preparing for is the bang moment where confidence is lost in all the legacy paper currencies and there's not enough gold and silver to go around. That's what the Chicoms are doing, but hey, trade if it makes you happy.

June 6, 2013 | Unregistered Commenterfallingman

The 'bang' moment could be a good way off yet, but we agree with the gist of your comments. And yes a few trades via skoptionstrading are helping to boost our coffers and concentrate our focus. Periods of consolidation can lead to apathy and a loss of concentration.

We need to be on our toes in order to spot the next rally when it presents itself. It could be this year but Im not as certain as many of our peers appear to be. New highs by the end of the year are a bit of a stretch for me, but things can change quickly, we will soon know!

Take care,

Bob K

June 6, 2013 | Registered CommenterGold Prices

If there's one thing you learn from watching this market for 40 years, it's that ANYTHING is possible in the short term ... up, down or sideways ... and at any speed, especially when the execrable Fed and the criminal bullion banks have free rein to rig the markets however they like with no fear of prosecution by their limp-wristed co-conspirators at the CFTC or the Department of "Justice." Don't expect the Powerz to arrest one of their own.

I wouldn't worry too much about timing an entry. A move from $1,700 to $3,500 isn't much different than a move from $1,400 to $3,500. It's all about the big picture and the big picture spells utter doom for paper and a re-crowning of gold as monetary king...officially or de facto. Just a matter of time. History screams that message loud and clear.

June 6, 2013 | Unregistered Commenterfallingman

Well said and thanks for taking the time to comment.

June 6, 2013 | Registered CommenterGold Prices

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