Are investors and speculators edging towards the exits on Europe? From Tom Luongo at tomluongo.me:
Gold is calling out the insanity of the European Union. It is also calling out the insanity of the global economy. But really it’s all about the euro at this point.
Since breaking through the post-Brexit high of $1375 per ounce, gold has pushed higher. Yes, it’s been volatile. Yes, the forces of control keep trying to stuff gold back inside the box, as it were.
And they keep failing.
Last week’s price action was impressive, even if the close was less than stellar. In the world of financial commentary everyone is looking for proximate causes for spikes and dips.
But most of that is simply noise. I don’t care why gold touched $1450 last week, only that it did.
Because a bull market that shakes off a number of big intra-week corrections to then blast to a new near-term high is a healthy one; one climbing the proverbial wall of worry.
And what’s important here is that this is not an anti-dollar trade. It is an anti-euro one. The U.S. Dollar Index has fully shaken off all attempts by the Fed to talk it down, trading at 97.6, and threatening a back-to-back monthly reversal at 97.8.
The euro is collapsing back towards its recent lows at $1.11 while the British pound is in free fall on renewed hopes of a No-Deal Brexit under new Prime Minister Boris Johnson.
Yes, Brexit is a proximate cause of these moves but they are also continuations of much larger and longer trends that cannot be ignored. It is the drive towards further political integration in Europe which is the cause of these declines.
The political landscape in Europe is, at best, fractious. And that is always reflected in a currency. This is especially true in what Martin Armstrong calls a “non-core” currency like the euro.
If the above charts don’t convince you, then this one should.
The dollar is the world’s reserve currency, for now. It certainly is versus the pound, euro and yen which are its biggest trading pairs. So when there is political unrest capital flows from that place to the reserve currency’s home, in this case the U.S.
And, despite the best efforts of the Democrats and The Davos Crowd, Donald Trump’s presidency is in far better shape than Ursula von der Leyen’s. Mish points out in response to my article from last week, that the EU is headed for even more gridlock and divisiveness than I’ve handicapped to this point.
I thought I was a euro-bear, but Mike makes me look like a Tesla punter.
Who does von der Leyen owe for her ‘election,’ Mike asks? It’s a good question but the answer boils down to George Soros and The Davos Crowd, who are desperate to keep Project Europe on the runway.
As long as Boris Johnson is not another stalking horse for the EU like Theresa “The Gypsum Lady” May was, he will have all the leverage between now and Halloween in Brexit talks.
And von der Leyen has been instructed to give Johnson whatever is necessary to achieve BRINO — Brexit in Name Only.
Only that will stop the bleeding of the euro, which needs to happen lest interest rates begin to rise. As long as there is no further technical breakdown of the euro, the current insane buying spree of toxic euro-bond debt will continue, per ECB President Mario Draghi’s plan.
The euro sliding below $1.11 reveals how unprofitable these current interest rate positions are and will unwind.
This further exposes Deutsche Bank. It should cause a spiral up in the U.S. dollar. Gold will get bid as well, on balance, as investors look to safe-haven assets.
Don’t underestimate China and Russia to come in and push the gold price up at vulnerable moments either. They have the money and incentive to do this. The more Russia de-dollarizes the more exposure to the euro they have in the form of corporate debt.
A falling euro and rising gold is exactly what companies like Gazprom and Rosneft want to see. On the flip side Europe is banning gas for new home construction, even as the continent moves towards more gas consumption.
This is the very picture of regulatory dysfunction. Just wait until the more powerful Greens get their political hooks into the European Commission.
The stampede out of the euro, given Germany’s increasingly precarious economy (and the slow motion implosion of Deutsche Bank), is just beginning.
- Brexit of some form not to the EU’s liking is on the table lest Nigel Farage becomes Prime Minister.
- Angela Merkel is on her last legs, physically and politically.
- France wants to punish the English for Brexit.
- Italy wants out of the euro.
And the U.S. is leaning on everyone not to get off the train of any of the post-World War II institutions it rules: the IMF, NATO, the EU, etc. That project is failing as well, but not today.
Weaponizing the dollar today will result in its destruction tomorrow. But for now, the dollar is still king and it is looking ready to push up, alongside a resurgent gold, to crush the unsustainable euro.