Diary of a Financier

The Euro & Gold: Why Is Everyone “Surprised”?

In Capital Markets on Mon 28 Nov 2011 at 18:51

Why do I keep hearing everyone say they’re “surprised” at the price action in Gold or the Euro?

Revisit an entry of mine from back in July, “EURUSD: Eye on the Wrong Ball.” That piece communicates a similar point I made recently in a StockTwit:

$EURUSD misunderstood: no net monetization yet, so EUR strength is prescient, esp considrng my Black Wed analogue–only conceivbl outcome. Nov. 9 at 9:12 AM

In fewer words, the Euro (EUR) has traded in accordance with its fundamentals. EURUSD has managed to stay afloat above 1.3150 because there’s been minimal monetization relative to the backdraft burning electronic fiat within European banks. In other words, deflation has set-in throughout the Eurozone, due to the rapid erosion of asset values, which just hasn’t been offset by liquidity injections. Economic data fails to exhibit this because banks–who own much of the impaired assets–mark the assets’ values to maturity, not mark-to-market.

Further, recall the September plunge in Gold (GC/). When the buildup to a Greek bailout failed to materialize, Gold loudly voiced the deflation at work. Similarly, Gold has flickered onward & upward with every recent assertion of Eurozone monetization–whether IMF/ECB/EU, real/rumor/retarded. Gold, too, has traded in a logical lockstep with fundamentals: deflation.

Nothing exhibits this better than a lovely chart. I’ve overlaid Gold & EURUSD, including the ratio of Gold/EUR:

Gold v EUR daily (Yellow=Gold/EUR)

Gold v EURUSD monthly

Note the acceleration of Gold/EUR once the EMU went live circa 2000. Was that a buildup to crisis or what? The Maastricht Treaty limited memberstates to 60% debt/GDP ceilings. The average is currently >87% debt/GDP. Enough said.

Now does everyone understand? Next, maybe I’ll write a little bit more about The Market[s] That Never Lie[s]: LIBOR, Eurodollar Futures, and I guess I can include US Treasuries (especially after today’s intraday performance in the face of an equity rally).

–Romeo

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  1. […] don’t think such earnest inflation is sustainable in the long term.  I’ve continually referenced the Gold market as evidence of the shift from net deflation to monetization, and that hasn’t […]

  2. […] and I don’t think such earnest inflation is sustainable in the long term. I’ve continually referenced the Gold market as evidence of the shift from net deflation to monetization, and that hasn’t […]

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