Daily Gold Update

Source: Reuters

New York— Collapsing confidence in the euro has become one of the principal factors behind the breakdown in the close correlation between gold prices and the dollar, suggesting gold may become something of a currency of choice this summer.

The euro�s 2005 decline has accelerated in the last three weeks after voters in France and the Netherlands rejected a proposed European Union constitution, which has raised question marks over the drive for broader European political unity.

The resulting political crisis in Europe has been one of the main factors driving the dollar higher, normally a condition of lower dollar-denominated gold prices, and decoupling the relationship between the euro and gold.

Yet gold, whether priced in dollars, euros or yen, has strengthened markedly in the past few weeks leading some analysts to say that it may now be emerging as a genuine investment alternative in its own right.

�To me, it�s one of the most interesting things to happen in the gold market for a few years,� said John Reade, precious metals analyst at UBS in London.

�The performance of gold means you can make the case that gold�s now a genuine diversifier (asset) of the dollar.�

Reade, while wary of buying into that argument, could be brought around if the recent movements in the euro and gold are sustained.

The euro has fallen around 4 percent in the three weeks since French and Dutch voters rejected a proposed European Union constitution in their respective referendums. The dollar index , a flows-weighted measure of the dollar against a basket of currencies, has risen around 3.5 percent.

Yet in that time gold has risen by almost 5 percent, hitting a 6-week high of $434.40 an ounce on Thursday.

The inverse correlation between the dollar and gold prices, or seen another way, the remarkably close link between gold and the euro, that has held steady for at least three years appears to be cracking.

�We�ve seen a de-coupling, mainly because of what�s going on in the euro,� said a senior bullion dealer at a bank in New York. This decoupling is �a little bit of a new phenomenon,� certainly not seen since the dollar started to weaken and gold ticked steadily higher in early 2002, he said.

Indeed, the close relationship between the euro, dollar and gold in recent years wasn�t just confined to prices and charts on a computer screen.

Until a couple of weeks ago, many banks traded gold from their foreign exchange desks, the dealer said. Now, however, the moves in gold and currencies have unnerved many traders, leading to a decrease in banks� proprietary gold trading and increase in investment fund activity.

�People are unwinding large (euro) positions,� and gold is benefiting, the dealer said.

The inverse relationship between the dollar and gold in recent years results from the fact that gold is normally denominated in dollars. With the dollar falling in value in the three years to January this year, gold, in dollar terms, moved up.

But the dollar is rebounding sharply this year. With the euro probing fresh 9-month lows this week, gold in euro terms is hitting record highs, trading above 357 euros an ounce (on Thursday. Gold also hit a 12-year high in yen terms this week, said Reade at UBS.

Brian Garvey, senior currency strategist at State Street in Boston, however, doesn�t see in gold�s broad-based rise, including against the dollar, a vote of confidence in the U.S. currency.

�In short, gold has become the currency of choice,� Garvey said. �Even though the dollar�s rally has been impressive lately, it�s a reminder that potentially there are longer term structural issues in the background that investors are concerned about.�

Technically, gold remains in an uptrend and the euro in a downtrend, analysts say, suggesting that the moves of recent weeks can continue.

Gold is often seen as a hedge for investors against inflation, political instability or gyrating financial markets. With political uncertainty dominating the Europe, it seems it�s the euro investors are fleeing from, a move that benefits gold.

�The safe-haven flow is moving from the euro to gold and other commodities,� wrote Peter Schiff, president of Euro Pacific Capital, a mutual fund in Newport Beach, California, in a research note this week.