Is The Euro Gold Fear Trade Bottoming

With dollar gold trading between $1,560 and $1,620 in the past two weeks, it is close to a major two year bottom on the price chart. Euro gold is even closer to major support; in fact the gold price in euro touched the lowest point since 1,5 year, at approximately €1,180.

Will support hold? If the latest decline of the euro in the foreign exchange market, then a major bottom should be in for euro gold. Only time will tell.

We wrote very recently that gold is considered a fear trade in the West, opposed to a love trade in the East. Anecdotal evidence is to be found in the following two charts. The first one shows the frequency of the words “euro crisis” appearing in Bloomberg’s news headlines, in the past two years. The second chart is the euro gold price over the same period of time. There is an almost one-on-one correlation between both charts.

euro crisis euro gold 2011 2013 gold silver general

In the daily update from Sprott, David Franklin today pointed to the top in July 2012, when Mario Draghi reassured the Europeans by saying: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Since the, investors became convinced that the European Central Bank meant business and took a sigh of relief.

There are signs that the European crisis is heating up again. After the biggest corporate bankruptcy in Spain’s history, the outspoken need to recapitalize Spanish banks, record unemployment figures in the Southern of Europe, falling industrial production … Italy sparks renewed uncertainty after their elections. David Franklin writes: “Italy does have some time to work out its domestic issues, however, and there are several support mechanisms in place that can help. There is currently ample liquidity in the banking system that can be deployed into the bond market in favour of Italian bond yields if the need arises. There is also the alphabet soup of programs that the ECB has established to support the European bond markets, with the OMT (Outright Monetary Transactions) and LTRO (Long-Term Refinancing Operation) programs standing at the ready. Lastly, Italy is one of the only countries in Europe that maintains a primary budget surplus, which may give them a little breathing room when negotiating with international creditors. Greece, Ireland and Spain, on the other hand, do not have this room to maneuver.”

Although no good news for the European people, this has the looks of a bottom.


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