Hold on to gold- Protect your wealth
Having for the last decade worked for US companies the USD/Euro and USD/GBP exchange rates were crucial to European profitability. In 2001 we could not sell product at a margin that was sustainable to the business long term, as the Euro was worth only 85 US cents. The perceived salvation was to move production to China to reduce product costs, however that was still very marginally and in the IT industry consumer prices were tumbling. The real salvation was that USD dollar weakened and the Euro and the GBPÂ strengthened, until the Euro almost doubled its 2001 exchange to $1.60 in 2008. Despite the continuing fall of retail prices the exchange rate ensured we kept our heads above water.
The following is extracted from an article by Dominic Frisby from Money Morning describes how we should not think of gold in the same way and become obsessed with the dollar spot price, but hone in on the gold Euro index, where gold now costs more than €800 an ounce and will be strong against the Euro as it struggles with the Greek crisis.
In early December, the euro was trading at all-time highs against the US dollar, somewhere north of $1.50. Across the continent, be it in Rome, Frankfurt or Paris, US nationals were seen to wince each time they reached into their wallets. Meanwhile German exporters grumbled about their lack of competitiveness.
Yet barely two months later, the euro has fallen by 10% or more. The sustainability of the currency has been called into question. Talk of the break-up of the eurozone is prevalent. And by Friday, short positions (people betting it will fall) against the euro on US futures exchanges had risen to $47.6 billion, the largest ever recorded net short position.
Greece makes up just 2.6% of the entire eurozone’s GDP. If it can threaten the currency and its banking system by running a 12.7% of GDP budget deficit, what damage might Spain do? She is running a marginally lower budget deficit of 11.2% of GDP. But she makes up almost 12% of the eurozone’s GDP – six times higher than Greece. Then there’s France (which makes up over 21% of eurozone GDP), looking positively prudent in comparison, with her deficit of ‘just’ 8.3% of GDP. Yet the eurozone deficit limit is supposed to be 3%!
Only Germany appears to be showing anything like fiscal sanity.
Hold on to gold – sterling’s turn for a fall will come
But those in the eurozone who bought gold will be happy. Gold had a huge day yesterday. It rose some $25. Yet it’s still almost $100 below its all-time dollar high of $1,216, recorded last December.
But if you measure gold in euros (see chart below), the yellow metal has broken out to all-time highs and now costs more than €800 an ounce.
I am forever saying that gold should be viewed not as a commodity but as another currency. Given the stress in the eurozone, is it any wonder that gold has been rising against the euro? I am also forever saying we are too obsessed with the price of gold in US dollars, when it is the price of gold in our own currencies that is important. Gold is your hedge against the fiscal irresponsibility of your own government.