Do you see the economic picture as deflationary, given the problems around the world, in particular in the EU?
In short, we don't. Money supply is rising, and thus the threat of deflation is limited. Whether or not solvency problems in the EU and other parts of the world will lead to financial turmoil is a different matter. Still, we continue to see and hear about inflationary ways to deal with these problems – providing funding, increasing liquidity etc., ultimately leading to more money being created.
The long-term implications (and since we’re discussing fundamentals, we can talk only about long-term moves, as fundamentals don’t drive prices in the short run) for precious metals are bullish as metals will be viewed as a "safe asset" to store money.
One can argue whether the EUR:USD currency exchange rate will move up or down, but what's more important for a precious metals investor is why these moves would take place.
If the EUR:USD falls because nobody wants EUR (problems in Europe) and they buy anything to get out of the currency (including USD), then investors will buy gold as well. However, if people are buying USD because they love it based on some superb fundamental information coming from the US (not because they don't like EUR), then they may sell gold in order to buy more dollars. So, in the long run gold can rise (and likely will) regardless of the situation in the EUR:USD rate.
Please note that at the same time, the correlation coefficients can provide us with a deeper understanding of the short- and medium-term moves.
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