Euro Strength Could Drive Gains in Gold
A commentary on recent events by National Gold Group’s Michael Carr – November 27, 2012
Despite warnings of catastrophe from Europe, the euro has maintained its strength against the dollar. Although catastrophe does seem inevitable in Greece, and perhaps several other countries in the European Union, Germany is expected to remain economically sound and that alone could support the euro.
The German currency has been a leader in the world’s markets for decades. Before the euro was introduced in 2002, the German deutsche mark was one of the strongest currencies in the world. Now, Germany accounts for nearly 22 percent of the economic activity in the European Union.
While the strength of Germany may not be enough to ensure the survival of the euro in the long run, it most likely is enough to save the currency in the short run.
The official value of the dollar is generally expressed with an index. The Federal Reserve calculates a trade-weighted index that considers how much trade takes place in any two currencies and assigns the highest weights to the euro because Europe is the largest trading partner of the U.S. This means strength in the euro translates directly to dollar weakness.
Gold usually records gains against a currency that is in decline. In addition to exchange rates, currency losses can also be caused by inflation. The dollar is suffering from both of these conditions and that sets the stage for gains in gold, based solely on these fundamental factors. In the long run, it seems inevitable that the dollar will continue to decline and gold will continue to gain.
The above commentary is for informational purposes only and is not a solicitation by National Gold Group or Michael Carr. It is the commentator’s opinion only and not intended for investment recommendations, and does not necessarily reflect the views of National Gold Group. Any references to outside sources are believed accurate. Past performance is not a guarantee of future results. All commodities involve risk. Investors should consult their financial advisor before making any investment decisions.