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Why Gold is Getting Dragged Down by The Euro Crisis

By: Peter Cooper, Arabian Money

With gold prices hitting a devilish $1,666 per ounce today, a seven-week low for the precious metal, some explanation is called for as the worry over money printing by central banks has seldom been higher.

Blame the euro if you are a gold bug. The sinking euro is boosting demand for the US dollar. And the greenback and gold – and all other commodities – usually head in opposite directions.

Dollar strength?

You can question this as a long-term phenomenon if you like. ArabianMoney certainly thinks that US debts and deficits will come back to haunt the dollar in the near future. But for the moment the dollar is the least ugly sister at the dance.

Indeed as ArabianMoney has pointed out many times in the past as the US financial markets sink the US dollar is the automatic beneficiary. Anybody selling a dollar-denominated asset gets dollars in return and that boosts demand for dollars.

However, there are also those analysts who see a tipping point for the gold price when the euro hits a certain level with holders of euros choosing to buy gold in direct exchange for their money. We are very close to that level right now.

Hence precious metal owners are in a bit of a quandary. Do you dump gold because the price is falling or buy it because the euro looks close to falling off a cliff?

Presumably the IMF intervention in markets just over a week ago is going to keep on pumping sufficient dollars into the eurozone banking system to prevent this happening in the short-term but it is still a nervous time.

Good times roll

One thing you can be absolutely sure of is that gold and silver prices will bounce much higher in the near future. Maybe we need to see a real crisis in the eurozone first, possibly early next year, and a revisiting of the 2008 lows for financial markets.

But the upside in precious metals is unmissable because of the money printing to date – whose real inflationary effects have yet to come through – and the money printing to come from central banks.

The Fed has QE3 ready to fire and the ECB is widely expected to drop its opposition to money printing as soon as fiscal austerity measures are imposed. Then the price of gold and silver will surely head to the moon.

Peter Cooper
www.arabianmoney.net

Posted Tuesday, December 13 2011