In USD, would the price of gold fall with the Euro?

November 26, 2011 10:38 PM

If the Euro collapses, will the price of gold in US Dollars fall as people seek to hold a stronger currency?
posted by 5ean to Work & Money (9 answers total)

Our debt problems are as bad as Europe's, although we are a bit more flexible for a variety of reasons. My bet would be that people will flee to commodoties, which have intrinsic value, over any currency. Although in the short-run US Treasuries will continue to do well, our debt is unsustainable, and sooner or later people will stop buying our bonds at these very low interest rates. Inflation and high interest is coming, unless we can manage to get our fiscal house in order.
posted by Crotalus at 11:41 PM on November 26, 2011 [1 favorite]

It's not a safe bet, because there would likely be greatly increased demand for gold in that circumstance. If you want to play that game, oil is more sensitive to dollar strength than gold.
posted by blargerz at 12:00 AM on November 27, 2011

Take it with a huge grain of salt, but the two old (middle eastern) international banker types I had lunch with last week were laughing about this in a gallows-humor sort of way. The summary of their fake mirth was roughly:

"We've been running away from the dollar for years... now we will run away from the Euro too for a while."

That plus my very non-expert sense of smell says that Crotalus is onto something. None of the world currencies look especially stable right now, to anyone. So gambling on any of them to benefit from another's fashionable weakness will be very much that, a gamble.
posted by rokusan at 12:02 AM on November 27, 2011

It isn't clear how gold will fare in USD.

There will be two primary forces at work: Demand for dollars, and demand for gold, as people would flee to both from the euro. The question is which force will prevail.

If you really think the euro will fail, the most direct way to profit is to just short it from the USD, as both USD and gold would each fare better than the euro.
posted by mikeand1 at 12:15 AM on November 27, 2011

If the Euro collapses, will the price of gold in US Dollars fall as people seek to hold a stronger currency?

Not if they decide to switch to Gold as a safe haven.

From what I understand, Gold goes up in times of economic uncertainty. Euro problems should mean a higher price for gold, and for US Treasuries.

Although in the short-run US Treasuries will continue to do well, our debt is unsustainable

Our debt is nowhere near 'unsustainable'. Unsustainable means that you can't raise taxes enough to cover the interest on the debt. In 2011 the interest on U.S. debt was 400 billion, or about 3.2% GDP.

The annual budget deficit is about $1.3T or 8.7% GDP. So, an across the board tax hike of 9 percentage points would be more then enough to cover our deficit spending.
posted by delmoi at 3:44 AM on November 27, 2011 [1 favorite]

If you really think the euro will fail, the most direct way to profit is to just short it from the USD, as both USD and gold would each fare better than the euro.

The "Euro" may fail as a 'project' without affecting it's nominal value. Even if countries break off from the Eurozone and start their own currencies, it may not damage the actual nominal value of one Euro.

On the other hand the ECB could "save" the Euro by printing more of it and buying government debt, which could potentially decrease the value, while saving the Eurozone as an economic system.

It all depends on whether or not the ECB pulls it's head out of it's ass, and there is no way to figure out what it will do.
posted by delmoi at 3:47 AM on November 27, 2011

The "Euro" may fail as a 'project' without affecting it's nominal value. Even if countries break off from the Eurozone and start their own currencies, it may not damage the actual nominal value of one Euro.

I'm not a currency trader or anything, but I don't think this is so. One of the biggest factors determining the relative worth of a currency is the stability and strength of the entity which produces them? Simply the fact that you'd have a whole country's worth of people rushing to switch money out would tend to put pressure on the value, and that combined with the vastly increased uncertainty about the stability of the union going forward would make the whole thing much more volatile.
posted by Diablevert at 4:20 AM on November 27, 2011

Diablevert: you are right, with one caveat. It depends on which countries are the ones getting out of the Euro. If France and Germany bail, then the Euro is sunk. If the countries who are in bad economic shape bail, the relative strength of the Euro goes up.
posted by gjc at 7:20 AM on November 27, 2011

How are you thinking the Euro will collapse? If the greeks leave and now the euro is France, Germany and a few followers, then the euro may well apreciate against the dollar.

One thing which michf give you a clue is to plot the price of gold and Italian yields on the same graph for this calendar year. If I recall correctly, gold would not have done that great a job in this leg of the crisis.

I have done this professionally for a long time and I just do not understand gold.
posted by shothotbot at 8:01 AM on November 27, 2011