GOLD SHOULD SUE THE EURO FOR DIVORCE

Chris Temple, Editor/Publisher
The National Investor
www.nationalinvestor.com

In recent weeks, the financial press has been compelled to increasingly cover the story of the broadening bull market in commodities. Hardly an hour goes by on stations such as CNBC where we aren't hearing of soaring prices for nickel, copper, crude oil and others. Even silver of late, which was left behind for so long, has been earning attention due to reaching fresh multi-year highs itself.

All of a sudden, though, the ugly duckling in the mix is gold. Mere months ago it was garnering this same attention, as its price reached its highest level since the mid-1980's. Now it has become an also-ran.

Wall Street's bullish move of nearly a year has finally been broken. Economic reports by and large are horrible. Deficit numbers continue to explode; including that of the trade deficit for last month, which set a new record in spite of the dollar's bear market. Al Qaeda, apparently, has struck again; this time in Spain.

Any of these things, gold bugs protest, should have gold sprinting back to first challenge-and then take out-its early January peak. Instead, the yellow metal remains mired in a down trend now entering its third month. Copper can set a new high helped along by some piling on by hedge funds, blow off briefly, and head right back up. Crude oil likewise is surging. Silver now seems to be the precious metal of choice; in percentage terms, it has been the most recent star (though I must point out to you that-just as the last phase of gold's move in 2003-it has been driven almost entirely by "hot money.")

So what, pray tell, is gold's problem?
The euro.
For much of last year-especially as both the dollar's decline and the euro's

inverse ascent gathered momentum during the second half-gold gleefully went along with the euro for its ride. The chatter in the market virtually every day centered around the reliable correlation between the euro and our favorite metal. The two were clearly mated; and the love affair seemed to just grow and grow. Gold was able to forsake all other beaus for its one true love. It seemed a marriage made in Heaven; especially as most players (and virtually all gold bugs) became complacent in their belief that the euro's rise versus the dollar would be never-ending.

The "for better or worse" part of this marriage of sorts between the euro and gold is being tested. Already suffering itself due to its first spurt to $430 per ounce having been too frothy, gold has more recently been grinding its way down as the euro has weakened. The euro has failed to maintain its bullish move. Giving traders barely the time to react after violating its 50-day moving average-a previously reliable support level-the common currency quickly proceeded to crack the 123.80 level, its last hope for keeping the broad up trend in tact.

Now, currency traders-particularly those dollar bears who in recent months have become rather giddy with the greenback's decline and the euro's reliable advance-will need to tread very carefully. As I have written in the recent past, I expect that technical reasons alone will take the euro lower still, now that it has broken its support. And with it will go its reluctant spouse, gold.

It seems a safe bet that the euro will before long test its 200-day moving average around 118. Whether that holds remains to be seen; but don't be surprised if it doesn't, as currency traders unwind with greater urgency the easy, profitable, one-way bets they've accumulated over many months.

How long gold will remain shackled to its partner's declining fortunes also remains to be seen. Soon, though, I think our downcast metal will begin to pine for loves of days gone by. It will realize that its fate should not forever be linked to the euro. The market-which helped broker this marriage, so sure was it that the dollar's decline and euro's ascent would go on uninterrupted and forever-will have to come around to this fact one of these days.

Ironically, I have been thinking for some time now that, once gold bottoms (and it has not bottomed yet) it may rally for what in the recent past would have seemed an unthinkable reason: a weakening euro. In my humble opinion, the euro/gold bulls have failed to realize a couple things. First, that the euro has risen in recent months largely by default. Money leaving the dollar in the foreign exchange markets has to have some place to go; and with Japan keeping the door closed as best they can, disproportionate amounts of money ended up going into the common currency.

This has, for many, given the euro the aura of stability, strength and all the rest. Granted, in comparison to the wildly profligate monetary practices being engaged in now by both the U.S. and Japan, the euro looks "less bad."

This won't last forever. Though the European Central Bank decided to hold interest rates steady last week, it WILL lower them before too much longer. The E.C.B. will allow itself to be dragged along by the new Greenspan regimen of having now the MAJOR currencies engage in competitive devaluations of their currencies. Though my gut still tells me that, in this whole mix, the dollar ultimately has farther to fall "on net," don't be surprised if many months go by without significant changes from current Forex market differentials. If anything, before it gets around to resuming its longer-term down trend, the dollar could very well strengthen further for some time to come.

One more thing to remember about the euro is that the very charter that created it has become a laughing stock. The Maastricht Treaty doesn't seem worth the parchment it was written on. This has caused serious financial and political strains among the current E.U. members. Already causing even further strains is the approach to E.U. enlargement later this Spring. Don't be surprised if all this doesn't go swimmingly, and if as a result the euro loses many of its fans.

As we approach the day when ALL of the world's major currencies are viewed with increasing scorn, gold will free itself from its unfortunate (and, now, destructive) attachment to one of them, the euro. It will sprout new wings, as the market place reassesses and embraces the reasons it needed to hold gold all along. This will bring about the new-and most dramatic-leg of the gold bull market I wrote of back in my Special Report on the sector in January.

Thus, the ultimate intermediate-term bottom ahead of us in the gold sector will prove to be every bit as glorious an opportunity to load up again as the few previous ones we've seen since the end of the bear market in 2001.

The preceding is an abridged version of a commentary appearing in the March, 2004 issue of The National Investor. For more information and to subscribe, go to www.nationalinvestor.com.