It’s gold for Europe

By Chris Becker

Where do the markets stand now that Super Mario has unleashed the demons of inflation – or is that deflation – with the unlimited bond buying program?

Let’s look at some charts from overnight, and some interesting words from probably one of the best macro hedge funds on the planet – I’ll use candlesticks to show you the size of the moves.

First, the Stoxx50 aggregate index, up 3.4%:

The Italian FTSE MIB index, up 4.3%:

The French CAC40 – even a bad unemployment print didn’t slow this one down – up 3%:

And of course, the German DAX30 – up 2.9%:

What does this all mean? Are we going to see another LTRO type post-Christmas 2011 move where stocks rallied around 25%? Well, they’re almost there already – so the question is this all priced in?

And looking at the DAX30 going back four years, the obvious target in this rally is almost overhead – do we all really think that with the entire Euro economy slipping into recession, with increased fiscal Greek-style austerity for those nations who put their hands up for the ECB to buy their bonds will translate into increased corporate profits and P/E ratios? Stranger things have happened (like a 25% rally during the GFC) which is why putting long medium term trades on right now is a no brainer…

What maybe more certain is the direction of our shiny little friend – gold – which leads me to the post by Cullen Roche over at Pragmatic Capitalism this morning covering Ray Dalio of Bridgewater fame/notoriety, with my emphasis added:

Gold is primarily an alternative to fiat currency and a storehold of wealth. The main advantage that gold has over other currencies is that it can’t be printed. While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years.

By the end of the quarter, central banks were starting to shift back toward renewed stimulation. In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment. Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work). As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets.

You’ve all seen charts of gold priced in AUD or USD – here ’tis in Euro – from a risk/return point of view and given the increasing proclivity for the printing press, what would Europeans be better off going into right now?


Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest.

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Latest posts by Chris Becker (see all)


    • Silver is an interesting one for sure. Had a paired gold/silver trade idea for MI recently, and using ETF’s for non-traders…

      If I had to choose between bunds and gold (or silver) I’d go the latter at the moment, but with a stop! always with a stop! (in fact shorting bunds is an interesting trade…)

          • it s better to be very very wrong sometime (i dont know for you but stops tend to get hit magically and then your loss is no more a paper one).

            there are quite few papers on how stops are a bad idea.

        • I would have thought this was mostly priced in. The OMT will be sterilized, unlike the LTRO, so it isn’t technically money printing. All this serves to do is take the threat of Armageddon off the table, so Draghi is just following through on a pledge he made some time ago. Unless lower peripheral yields kickstart a confidence-led recovery, it’s difficult to see how this policy will lead to a sustained rally. But, stranger things, etc..

          PMs could be in for a whacking tonight if NFP is strong, and its hard to see them tolerating another “not now but we’re ready to do it” from the FOMC next week. If there’s a high NFP print Bernanke is going to need to resort to some serious doublespeak to get that one through.

  1. I’d like to buy in – gold perhaps. But ETFS gold, for example? Physical gold? What’s best?

    Its all a bit confusing.

    • paper gold… might as well give your money to TAB at least you can see your horse run. If anyone seriously believes the money they have “invested” has a piece of metal with your name on it.. well then you deserve to lose it

    • Work out WHY you are buying… short term trade? ETF probably easiest route. Expecting the end of the financial system? Physical all the way 😀

      There are advantages and disadvantages to the various ways of owning Gold. Even if primarily a trader using “paper” Gold products I still think a core position in physical metal is important.

      • Appreciate the feedback.

        Looking at PM Certificate Program – guaranteed by the WA Govt.

        (not that I can bank on that mind you)

  2. The market has been expecting it as have I. Lots of money made in the last day or so. Either way trade the volatility.

  3. “The main advantage that gold has over other currencies is that it can’t be printed.”

    True but then it can be dug out in greater quantities when the price is higher so how is that different to printing currencies ?

    • Global mine production has fallen over the last decade as the price rose from US$300 to US$1700 (today).

      Mine output is falling.

      Not as many reserve ounces being replaced as mined.

      Grades are falling.

      Gold is finite. Not as simple as just digging more up.

    • There’s a tad more to it than just digging it up. Exploration, modelling, financing, construction, digging, processing, it’s a multi-year, multi $M exercise to swing a gold mine into production, or even to expand an existing mine.

      Grades! We’re mining 1.1g/t & that’s quite profitable even on the edge of the Sahara. When I started in the game anything below 3g/t was waste….

  4. I totally agree with Buffet about gold. It does not have any utility. It just sits there doint nothing.

    Besides, it is not as safe as people think. Fukushima is a timely reminder that gold can lose its shine if exposed to radioactive radiation. If you want safety you will have to insure it, so gold will eat money.

    • It’s an alternative currency – ie. alternative to fiat.

      This day and age, it benefits (ie. appreciates) as people lose Faith in fiat-based systems.

      Not rocket science, really, but your opinions are, IMHO, off the mark about its proper function.

      • Don’t get me wrong, I do not *hate* gold. It is pretty useful in many engineering applications. But, given its lack of utility as an asset, I would requre a greater premium (margin of safety) than other asset classes.

        As to the gold as an alternatie currency, there are three problems with that. (1)adopting the gold standard would mean that a govenment loses its priviledge of printing its currency (and the implicit guarantee that a govenment can never go broke by debts denominated in its own currency). It is hard to envision a govenment relinquish its previledge. (2) If only one country adopts the gold standard, its currency would appreciate against the rest, and its exporters would go to the wall. (3)If all majar countries adopt the gold standard, that would freeze the exchange rates among all the major currencies. Unless the interest rates of these countries can somehow be synchronized, regardless of the economic cycles in these countries, it will create a huge black market in forex.

  5. Like any trade, once everyone starts talking about it being a “good idea” then it is the time to sell (and sniff out the next best thing).

    But for the next few years, I think gold nicely fits into that category.

    Kinda like Australian residential property really…….