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“Security is the chief enemy of mortals.”

                           William Shakespeare

FX Trading – Gold is telling us something … as usual

In our webinar yesterday, we showed a chart comparing gold and the US dollar index, as you can see below:

We said what is interesting about this chart is the fact gold and the US dollar have moved in a positive correlation lately. We’ve highlighted the area on the chart roughly where you can see the two price series started moving together. This isn’t usually the case as you well know.

In fact, we usually see a very tight negative correlation, i.e. gold strength and dollar weakness and vice versa. That makes some economic sense, because as gold is priced in dollars, and gold must maintain global purchasing power as an international standard, a fall in the value of the dollar should coincide with a rise in the value of gold. But now,
they are trending together. What has changed?

We think the rising eurozone risk is what has changed this picture. The chart we didn’t
show in our webinar yesterday was the one below, and it’s quite interesting and we
think it is more supporting evidence for our thesis that sooner or later the euro will
break down again, in a very big way.

Gold (red) versus Ireland-German 10-yr Bond Spread (black): This is a tight positive
correlation which shows rising risk, evidenced by rising spreads, translates into higher
and higher gold prices.

If you are a big euro investor, and you don’t like the dollar (for a lot of very good
reasons) gold seems the proper hiding place. Of course one other hiding place is being
sought along with gold, and that is the Swiss franc.

What we’ve done in the next chart below is overlay Swiss franc – USD (green) on top of the chart above—Gold and Ireland-German 10 yr Bond Spread. It seems to be one big
happy family of correlation…

So, it seems the safe havens—gold, Swiss franc, and the US dollar (yes a safe haven only because of its world reserve currency status)—are all pointing to rising risk of another eurozone crisis waiting to happen.

If you think the eurozone gets in trouble again, you know where to hide. If you think all is good, no more crisis in the eurozone, you know what to do … buy EURCHF with both hands and feet.

EUR-Swiss franc Weekly: Recent all-time low in this pair…

For now, we sit squarely on the fence, pecking away at seeming near-term opportunities. But, if yield spreads continue to blow out in Europe, a new big trend lower in the euro will likely resume and gold will likely make my esteemed father-in-law a very happy man.