Daily Nugget: Is Gold a Hedge Against the Euro or the Dollar?

No Acceleration of the US Economy

The president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, said, “he is not expecting an acceleration in the US economy in the near future but instead for growth to continue at its current modest pace.”

Jeffrey Lacker went on to say that consumers are likely to remain cautious about spending as productivity growth is expected to remain low and the housing market will likely remain dampened. He suggested that all of these factors would contribute to a withheld economic growth in the near term. He expressed this economic forecast during a Rotary Club of Charlotte meeting.

FOMC Meeting and the Middle East

Trading has continued to be quiet this week as there has been little world economic news. As discussed yesterday, traders are eagerly awaiting the FOMC meeting minutes from the Federal Reserve that are due out this afternoon.

Despite the lack of news something that has kept traders and investors busy is the news that Israel has launched a military offensive on the Gaza strip. The Hamas group has retaliated with its own rocket launches into Israel. The continued geopolitical tensions in the Middle East will carry on turning people to the safe heaven of precious metals however this may only be short term.

High Performing Gold Backed Assets

Holdings in the world’s largest gold-backed ETF have now erased declines seen since the beginning of the year. This is an interesting turning point for the gold product, and for gold bears that have pointed towards ETF outflows as a sign that the gold bull-market was over. We are now looking at gold and silver prices that have outpaced equities, treasuries and bonds. This is an interesting fact for Goldman Sachs who forecast a bearish end-of-year gold price, earlier this quarter. The high performance of these gold backed assets should give growing confidence to markets, and we would expect this to give precious metal markets, especially gold markets, further strength.

Is Gold a Hedge Against the Euro or the Dollar?

Last night on CNBC Peter Schiff, the CEO of Euro Pacific Capital and one of gold’s biggest proponents, and Dennis Gartman, the editor of “The Gartman Letter” who is sometimes called “The Commodities King,” had a debate on whether the US dollar or the Euro had further to fall.

“Peter’s talking about the fact that the United States is going to continue to destroy the US dollar” Gartman said. “But we also had the ECB come out and tell us last week that it will, in fact, be expanding reserves. I think you’re better off being long of gold in euro terms than you are being long of gold in dollar terms for the foreseeable future.” It is interesting that Gartman believes you should buy gold as a hedge against the euro, as opposed to Schiff who resolutely believes that gold is a dollar hedge. Overall, we would argue that gold is a hedge against the actions of central bankers to devalue currencies.

Whoever is right, it is apparent that nether currency is looking strong in the long-term, given the levels of central bank intervention. This is further evidence still that gold will be seen as a safe haven whether bought in euro or dollar terms.

Round UP

We will round up this week’s daily nugget with Peter Schiff, the chief executive officer of Westport (a Connecticut based Euro Pacific Capital group) telephone interview. He said, “There is still a lot of skepticism in the market, but once we see gold go above $1,400, we will see more buyers come out. At some point, the fear of gold going to $1,000 will be replaced by ‘I don’t want to miss out.”