Global Watch - The Gold Forecaster
The De-Coupling of Gold from the € & the $

Julian D.W. Phillips
Nov 12, 2005

Excerpts from the "Global Watch - The Gold Forecaster."

...The de-coupling of the gold price from the $ and the € is now complete. Initially it was thought to be a shift, a sort of one-off adjustment, but it has now developed into much more. The most notable feature of the week has been the climb in the € price of gold to attack the €400 level, in the wake of a weakening €. It was not quick to rise with the $, but it did so in the second half of the week and rose in terms of the U.S. $ to show it had de-coupled.

Market players tend to treat such events as simply changing formulae in the market and don't weigh the implications of the fundamentals behind the changes. Because of this the price moves tend to be minimised until the full force of fundamentals moves are felt. But this de-coupling is a huge change and one that has to be understood properly. It confirms that the 'Bull' market in gold is set to begin properly!

What is happening is that € holders are seeing their currency fall and gold is describing the fall better than the $ is, because the $ is falling as well. Both currencies are taking strain, but because we tend to look at one from the other it is difficult to focus on what is making them both weaken.

Just as the Fed is raising rates to be able to tackle expected inflation coming down the pipe, so their actions demonstrate the reality of their fears, despite the core inflation appearing benign at present. Why inflation? The oil price has dropped back from $70 a barrel but remains at a rising average well above previous levels seen before. Few people are convinced that the oil price has stopped rising. Most accept that in the medium term the oil price has some way to rise, possibly to average $70 - $80 in the future. These prices have to be passed onto the consumer at some stage, so as to restore profit levels. If this does not happen the net effect on the global, not just U.S. economy, is the same as increased taxation, a direct withdrawal of spending power from all levels of the economy, particularly from the consumer's pocket. This will lead to a diminishing of growth levels if not a recession. The global economy does not simply recede it adjusts to favoring the cheapest goods and moving away from the more expensive goods, as a first line of defence against a recession. This favors Chinese products over others. The full picture of this move is to structurally change the global economy in favor of the Asian economies over the Western ones.

Over time the currencies of Asia ascend in terms of their place in the global economy, whilst the developed world currencies will reduce their presence in the global economy. Such structural adjustment has begun in terms of the valuation of the Yuan in China ready for the day the Yuan takes its place on the world scene, pushing aside the U.S. $ and the €, to some, if not a large extent.

Bear in mind that the Yuan is the currency of 1.4 billion people and the $ the currency of around 300 million people. The growth in wealth need only be proportionally smaller for the wealth of China to overtake that of the U.S.A. Of course the entire globe will face the same pressures from the oil price and subsequent inflation or recession, including Europe and China. But it is the € and the $ whose currencies are sufficiently global to reflect the uncertainties facing us all. Not surprisingly the Europeans will be far faster to turn to gold than the average U.S. citizen.

The sagacious Investor takes action on this well before the event. So the Investment demand for gold that will be necessary to take gold to new heights is beginning and will grow over time to a significant proportion of gold purchases. In the light of the already tight Supply & Demand balance in the market place for gold, even small moves into gold by large Investors has a very big impact.

Add the two situations together and you can see why gold has de-coupled from both the € and from the $.

The Euro
Above you see a picture of the Eurozone, the countries that actually use the € as their currency. There are around 400 million people to whom the € is the only money they know. The currency has been in existence for nearly 8 years and replaced the currencies of the countries that now use it. No longer is there a French Franc or an Italian Lira, etc. In changing their currency they had to transfer their faith from national currencies into this new one reflecting the 'coming of age' of the "Common Market". Until recently, the currency gained the respect of the international monetary community as it gained in power and in use. Particularly attractive was its provision of an alternative to the U.S. $.

It is gradually enlarging its presence in National Foreign Exchange Reserves globally. By contrast the presence of the U.S.$ is diminishing having dropped from 76% to 68% over the last few years.

What is a remarkable performance is the unification of a diverse set of nations, who do not share the same currency happily, as each nation has its own weaknesses and problems, which cannot be easily accommodated under one currency roof. The onus for a credible currency performance has shifted from national control [which happily allowed fluctuations that accommodated poor economic disciplines] to a Central European control which demands that each nation adjust its economic behaviour to a standard that demands far better monetary and economic behaviour than they did of themselves. The consequences are the same that a fixed exchange rate regime has, mainly the flow of capital from inefficient areas to efficient ones.

Of course, when the performance of the group as a whole diminishes the € will reflect it. At present growth is not nearly as vigorous as in the U.S. so it is not in the position to raise its interest rates to combat expected inflation. As a consequence, the interest rate differential between the Eurozone and the U.S.A. has and will widen substantially. Gold, a 'currency' well known, loved and valued since Europe began, remains an alternative to the €, now more attractive than other currencies. As the € had declined of late, the gold price in the € has risen strongly to tackle the €400 level. Europeans are clearly turning to gold as opposed to the U.S. $ because the entire global financial scene has become uncertain, nit just the €.

The rise in gold in the U.S. $ of late confirms global uncertainties.

12 Member States of the European Union are participating in the single currency:
Belgium,Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal and Finland

Non-participants:
Cyprus, Denmark, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Sweden and the United Kingdom are members of the EU but are not currently participating in the single currency. Denmark, Estonia, Cyprus, Latvia, Lithuania, Malta and Slovenia are members of the exchange rate mechanism II (ERM II). This means that the Danish Krone, the Estonian Kroon, the Cyprus pound, the Latvian lats, the Lithuanian Litas, the Maltese lira and the Slovenian Tolar are linked to the €.

It is expected that in the future more countries will join ERM II.

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Here is one of the regular Technical Analyses we provide in the publication:-

Technical Commentary: 10-year Treasury Note - Rates on the Rise

Treasury retraced from strong recent gains, sending yields back towards 4.5%. With the FOMC raising rates to 4% and the likelihood of more into early 2006, even a flattening yield curve should elevate the 10 year towards and slightly above 5%. Yet despite recent record inflationary data, the core inflation data has kept some inflation fears subdued. Yields remain relatively low but pressures are mounting. With Ben Bernanke now likely to be elected as the next FOMC chairman, see the last issue, there may be some doubt as to the degree of future rate increases. This will become more apparent as we enter early 2006 with rising inflation and a weakening economy. There will be much attention being placed on the all important Christmas retail sales period. This will reveal if the rapid decline in the US consumer confidence will indeed translate into lower sales.

Nov 11, 2005
Julian D.W. Phillips

321gold Inc