Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

20 Year of Eurozone and Gold

Commodities / Gold & Silver 2019 Feb 08, 2019 - 05:50 PM GMT

By: Arkadiusz_Sieron

Commodities

The old continent is dying. The euro is on the brink of collapse. This is what you can often hear in the press. But is that really the case? We invite you to read our today’s article about the development of the Eurozone in the last twenty years and find out what are the real prospect of the euro – and what does it imply for the gold market.

In December, we celebrated 40 years of market reforms in China. In January, there was another important anniversary: 20 years of the euro area. So, let’s move from East Asia to Europe, analyzing the economic situation of the Eurozone and its implications for gold.

After years of negotiations and preparations, the euro was launched on January 1st, 1999. Initially, the shared currency was only virtual, and the national currencies were still legal tenders used in circulation. For ordinary citizens little changed. However, the exchange rates between national currencies were locked at fixed rates against each other, while the European Central Bank took control over their monetary policy. The euro notes and coins entered the circulation three years later.


The first members included Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Greece joined the club in 2001, thought it should not have done, as it turned out later. Since then, seven more countries – Slovenia, Cyprus, Malta, Slovakia Estonia, Latvia, Lithuania – entered the Eurozone.

At the beginning, everything was running smoothly. But then the financial crisis hit the Eurozone heavily, revealing significant defects in its architecture (the fatal flaw is that there is a currency union with the several independent fiscal policies). It was quite perverse, as the Great Recession erupted in America.

However, the US – with its unified fiscal and political system – overcame the crisis relatively quickly. On the contrary, the Eurozone suffered a prolonged depression, as the financial crisis morphed into the sovereign debt crisis. Only when Mario Draghi famously pledged the ECB would do “whatever it takes” to preserve the euro, the market turmoil calmed. 

The truth is that the Europe’s monetary union is still unfinished, as there is neither a true banking union nor a capital market union. This is because the euro was the political project from the beginning, not an economic one. It was never an optimal currency area. But the idea was that the euro would push European countries toward deeper integration, making wars impossible. As economists, we are, thus, a bit skeptical of the prospects of the common currency and the whole bloc. Indeed, as the chart below shows, the Eurozone performed worse than the US. The former economy grew 31.4 percent by Q3 2018, compared to 50.5 percent for the latter.

Chart 1: Real GDP growth in the Eurozone (blue line) and in the US (red line) from Q1 1999 to Q3 2018 (as an index, where Q1 1999 = 100)

However, the pace of growth was also lower than in the US before the introduction of the euro. And the common currency did not prevent the whole bloc from growing (although the performance differed among the countries). Actually, the euro’s performance has been demonized. Its performance has not been as poor as one could expect, given the moderate growth in the GDP and all those gloomy headlines. Just look at the chart below, which presents the EUR/USD exchange rate since the creation of the euro.

Chart 2: EUR/USD exchange rate from January 1999 to December 2018

As one can see, the euro’s value against the US dollar was initially $1.1812. From then to the end of 2018, it dropped to $1.1456, or 3 percent. Not so bad, given that fact that it is used in several economically distinct countries.

What are the implications for the gold market? Quite important, as it turns out. Please look at the chart above once again. Although the correlation is not perfect, it’s clear that the performance of euro, which is the second widely used reserve currency in the world, is significantly linked to the gold prices.

It’s true that the Eurozone faces many problems, including still weak banking system or the rise in populism. But investors should acknowledge that the euro area is more robust today than it was at the start of the Greek sovereign-debt crisis (for example, the European policy makers established the rescue fund and launched the banking union). Moreover, despite the populist revolution, almost 75 percent of the Eurozone’s population support the euro. Even in Italy, almost 70 percent supports the common currency. And funny enough: when the risk premium increased, Italy’s new government also started to express more sympathy towards the euro.

All this means that the euro is out of the danger zone, at least in the short run. Actually, the slowdown of the U.S. (and China’s) expansion could push investors towards the euro-denominated assets, especially when the ECB starts finally hiking its interest rates. If that happens and the euro strengthens against the US dollar in the second half of 2019, the price of gold may go up.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 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