Gold Makes New All-Time Highs, Euro Falling

Tuesday, May 11, 2010

Gold roared to new all-time highs today after the US equity market collapse last Thursday stimulated a panicked flight to quality and the European Union's debt aid package has investors feeling heightened worries of fiat currency debasement. The Eurozone's debt package is simply a way to paper over the problem: buy debt and print it away. Debasing the euro may be the best way to smooth out the pain over time by inflating rather than feel a rapid economic contraction if deflation takes hold. While this may or may not be the best course of action, it does have plenty of implications especially in currency and commodity markets. With the US engaged in extremely expansionary policies as well, the only safe haven is the shiny metal itself: gold.

There are some relatively worrisome happenings in the euro currency market for investors. The euro has been taking a beating throughout 2010 so far falling from a late-2009 high of over $1.50 to a current price of $1.2637. The debt aid package announced on Sunday night immediately had the expected and intended effect. The euro leapt and debt yields plummeted, most notably for the PIGS (Portugal, Italy, Greece & Spain). After hitting lows of $1.2518 last Thursday, Sunday night's announcement spurred a surge in the euro back to almost $1.31.

Yet, now after a couple days have passed the enthusiasm has quickly dwindled as demonstrated by the euro now trading back near the lows of the year. The EU specifically wanted the package to "shock and awe" investors but currency market participants are seemingly unimpressed. A lot of questions still remain such as how the special purpose vehicle (SPV) will be run, what will the rules be, how will countries be punished for missing payments, etc. I won't jump to any conclusions based on a couple days of price action but I'm wondering if the currency markets aren't reflecting a persistent doubt about the long-term success of this plan and the euro currency itself. Monetary unions have not had much success in the past and if a €750 billion package cannot soothe fears, I'm not sure anything will.

Disclosure: Long GLD.
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