Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Gold, Dollar, Euro & China: Four To Tango in 2011

Stock-Markets / Financial Markets 2011 Dec 29, 2010 - 03:28 PM GMT

By: Dian_L_Chu

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleFor the most part of 2010, the typical image of Europe—one of cultural sophistication—has been replaced by widespread riots, burning cars, large scale strikes over labor reform and unemployment resulting from austerity measures amid a sovereign debt crisis in the region.


Gold Chart’s European Tale 

Fear about defaults and more bailouts throughout the European Union (UN) has formed a dark storm cloud hanging over the otherwise robust global rally, and pushed Gold to an all-time high of $1,432.50 an ounce on Dec. 7.

The market’s emotion related to the European debt crisis is clearly reflected through the interaction between Dollar, Euro and Gold, where you can literally trace the timeline of significant macroeconomic events in Europe and the United States (See Chart).


The general pattern is simple - Whenever there’s bad news out of Europe, investors first course of action is to dump Euro and go into gold and dollar as the two top safe haven choices…. and vice versa.

Conventional Wisdom Rewritten

Historically, gold is seen as the ultimate hedge against inflation and dollar weakness with a typical inverse relationship with the U.S. dollar. Meanwhile, Euro had been gaining on the dollar as the choice of global reserve currency over the past decade mostly on concerns over the mountainous debt of the U.S. government.

However, the conventional wisdom has been totally rewritten by the global financial crisis, the European debt crisis, and the unprecedented and synchronized global quantitative easing. As horrendous as the U.S. budget deficit and debt situation is, compared with the depth and breadth of European debt woes, investors now see euro as the risky currency, while dollar has regained its safe haven status as Gold.

China In The Gold House 

So, how will the dynamics between Dollar, Euro and Gold play out in 2011?

At current price levels, the main gold buying action will come from investors and funds as inflation and currency hedge as well as price speculation, instead of from jewelry demand. From that perspective, there’s a fourth major player, in the name of China, emerging in the global gold market.

Bullion Vault noted that with savings-deposit rates now more than 2% below the rate of consumer-price inflation, China has fast become the world's No.2 source of physical gold demand. In fact, China recently revealed that its gold imports rose almost 500% year-over-year to 209 tons during the first ten months of this year.

China’s Surging Gold Trade

People’s Daily Online also noted the explosive growth in China's private gold investment market. In the first three quarters, the individual customers in Shanghai Gold Exchanges neared 1.6 million; gold trade exceeded 4,600 tons and its turnover topped 1.1 trillion Yuan, both rising sharply. That means Chinese has traded more gold than the total global identifiable demand (about 3,201 tons) over the first nine months of the year.

Love of Gold – A Chinese Tradition

The surge in China gold demand seems to have befuddled some including Richard Daughty (aka The Mogambo Guru) at The Daily Reckoning who wrote “…there is nothing about Chinese trusting gold for the last few thousand years or so.”

Well, let me set the record straight here.  The Chinese, like many other Asian countries, have a tradition of reserving and investing in gold for thousands of years. Gold and real estate are typically the top two investment choices mainly due to a distrust of paper instruments resulting from much turmoil throughout the region’s history.

It is mostly this propensity, the clear present danger of an escalating inflation, and rising tensions at neighboring Korea, that are behind the rising gold demand in China

Gold = Financial Competitiveness

What’s more telling is that according to People’s Daily Online, in August, six China ministries, including the People's Bank of China, and the China Securities Regulatory Commission, jointly issued a notice to promote the gold market and positively connected the future development of the gold market with the competitiveness of financial markets.

China is already the world’s top gold producer, but has remained somewhat muted in the global gold market. Now, with the expanding of the Chinese gold market (China just approved its first gold mutual fund on Nov. 29), the increasing investment demand from the Chinese government and / or individual investors will become a major force influencing the world gold market.

China Can’t Save the Euro

Now, let’s take a look at the Euro.

According to data from the Bank for International Settlements (BIS), German and French banks have the largest debt exposure to Ireland and the southern rim of euro zone in the second quarter--so, the European debt crisis most likely will not evolve into a global contagion as many have feared.

Nevertheless, due to the single currency union’s inherent structural weakness, EU has not been able to agree on any meaningful system-wide measures to combat the debt crisis. As such, EU’s country-by-country, crisis-by-crisis approach is only adding market volatility, and further derailing the region. And not even China’s pledge of its $2.7trillion overseas investment fund as European debt rescue could thwart market’s pessimism about the euro.

Spain – Too Big To Bail?

Multiple rating agencies already put Portugal, Spain and Greece on future downgrade watch, while Italy is another highly indebted euro member persistently coming up in market chatters.

Deutsche Bank AG has pegged Portugal as the next seeking a bailout after Greece and Ireland, while Spain is a hidden debt bomb dubbed as “too big to bail” since the size of Spain’s economy (about $1.4 trillion, with 20% jobless rate) is twice that of Greece, Ireland and Portugal combined.

Moody's estimated Spain may have to raise €170 billion from the markets next year, not including the amount banks may need to recapitalize. Bank of England, meanwhile, is not instilling much confidence either by forecasting a possible return to recession in 2011, adding that further quantitative easing may be used, if an "external shock" hits the economy.

Expect A Full-on Assault on Euro

All this is not to say other EU members are in good financial and fiscal fitness either (See Graph). So, if you think the series of down-grades and rising concerns on euro zone countries' debt has worked against the euro this year, expect a fresh new round of downgrades--over debt or growth prospect—to bring about a full-on assault on Euro next year, particularly when you see Spain come up in headlines.


Trouble in Euro should boost Gold while providing support to the Dollar (i.e. the dog with fewer fleas.), which is the scenario that would play out in 2011.

Global Inflation Spike

Inflation is already running rampant in countries like China, Russia and India, mostly driven by food shortages. In Beijing, for example, food costs soared nearly 12% year-on-year in November. Now, on the heel of U.S. Federal Reserve’s QE2 announcement in Nov, more monetary easing could be expected from central banks to stimulate their economies in 2011. This will only add fuel to the fire of the growing anxiety over rising inflation, and again bode well for gold.

Gold As a Reserve Currency

The shiny yellow metal is headed for a 10th straight annual gain. But with excess liquidity distorting everything, the typical trend and regression analysis will not work any more.

Nonetheless, combining the fundamental factors discussed here and technical signals, I believe Euro could break below $1.25 or even $1.20 sometimes next year, and could be as early as the first half.  This could drive gold upwards towards the $1,600 levels. U.S. Dollar and Treasury would gain support as safe haven, which could push the bond yield down.

Furthermore, it is worth noting that Gold priced in Euros has risen more than 38% so far in 2010, reaching a new record high above €34,475 per kilo, far outpacing the Gold’s nominal price gain (in dollar) of around 28%.

So, in a way, gold is treated almost like a second reserve currency replacing the Euro, and you would have gotten a better return getting into gold via Euro.

Disclosure: No Postions

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules