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All That Glitters


I’ve had some readers of the blog email me about Summer vacations in Paris, Italy, and Barcelona relative to the falling Euro. They are deservedly excited to be getting under $1.25 Euros to the Dollar (I paid over $1.35 in February when I was in Paris).

But that got me thinking that the current strength in the Dollar and the current weakness in Gold are following a historic pattern. If you look at the chart above, you can see that there is a decent correlation between the Dollar and Gold – since 2001, the Dollar has been falling and Gold has been rising. Yes, there isn’t a perfect correlation – nothing is ever perfectly correlated other than death and taxes (both arrive way too soon). However, a weak dollar generally means that gold will strengthen.

So the investment question is obvious: since we are in a period of Dollar strength due to the economic foibles in Europe, is there an opportunity to buy gold or gold stocks while the dollar is strong in comparison to the Euro? This clearly assumes that at some point, the dollar will weaken again.

To answer that, we need to look at what makes the dollar weaken. Since it is traded against other currencies, a strong dollar implies that the US is stronger than other widely traded currencies – that is true right now when you compare it to the Euro and the Yen (whose Japanese debt was recently downgraded by S&P). But, I don’t think you can say it is true when you compare it to the Chinese Yuan or the Brazilian Real – two countries with strong balance sheets (compared to our own laughable one), positive demographics, and an growing middle class.

My opinion is that the European situation will be difficult, but that the German Government will find a way to support the rest of Europe and the threat of financial doom will subside. That will equalize the unattractiveness of the Euro to that of the Dollar, and both will slide in relation to the much strong emerging economies – not to mention the commodity economies like Canada and Australia.

Gold will then continue on its upward path as the US, Europe, and Japan print more money to pay down their respective debt – and that debasing of their currencies will lead to higher gold prices.

Based upon this, we are adding to gold miners in client portfolios – particularly the junior miners whose stock prices have been crushed during the recent pullback in gold prices. We are viewing this as an opportunity for the long-term – it may not work out right away, but for those with a long-term view it should be very profitable.

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