Gold up, Euro down

By Pete Southern in LiveWire Economics Blog | January 26, 2009 18:15 |

Gold rose for the eighth consecutive year against the dollar in 2008. Thanks to an unstable economy and a zero per cent interest-rate policy established by the Fed following several rate cuts during the year, more and more speculators turned to the safe money bet (gold) in exchange for dollars.

According to goldmoney.com, a leading source of online resources and analysis on gold investing, the annual rate of return for gold over the last eight years has been 16.3 per cent. Site founder and leading gold expert James Turk believes the upward trend in gold is going to continue at least through 2009. He says there are no signs of a stronger dollar and the Fed is likely to leave the interest rate at zero per cent for a while.

Turk has also expressed that with gold’s performance during the recent run, the commodity has produced gains that are consistent with even the best stretches in the stock market. Gold has been a winner for long-term investors in the commodity over that stretch. Despite the long-run of success, Turk still thinks many people have not tapped into the strength of gold as a safe investment in a down economy. He has also been saying for some time that the gold value has much catching up to do with inflation over the last couple of decades.

While gold has been a safe investment against the weak greenback, foreign currency speculators and analysts appear to believe the European currencies are set to under perform against the US currency. Most European economies are in similar financial and housing struggles that have burdened the US for well over a year. The difference is that the European community appears to be behind the US time cycle in terms of its economic downturn.

Leading European bank Saxo has already forecasted that the Euro will drop below $1 in value later in 2009. This is an amazing thought given that the Euro just established a new all-time high against the dollar in mid-2008. The currency of the European Union members touched $1.61 at that point. The Euro dropped to about $1.25 late in 2008, but then climbed back over $1.40. It dropped nearly 10 pips though in about a week and closed just below $1.30 last week.

The British Pound has not faired much better against the dollar. It too has dropped significantly in the last week or so and currently closed out last week below $1.38. The British currency climbed as high as $2.06 late in 2007 and was still around $2 for much of early 2008. The free fall in the Pound has also been amazing and it is expected to continue to give ground against the dollar.

While the weak US economy and a zero per cent interest rate policy have caused many to trade in unstable dollars for gold, weak European markets and falling oil and gas prices have led to the dollar’s rise against its European counterparts. The dollar tends to move more strongly when stimulated by oil developments than other major currencies. As the US is very dependent on foreign oil, the dollar is a loser in oil soars and it tends to outperform the European currencies when oil is relatively low.

Many eyes are set upon new US President Barack Obama as he focuses much of his early time and energy to dealing with a struggling US economy. Stimulus plan developments, retail sales, housing and credit markets all will have a say in what happens with the dollar, gold, and other currencies in 2009.

Neil Kokemuller

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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