Since the euro is a primary benchmark against which the relative value of the dollar is established, the discussion among fellow PM investors increasingly turns to the scenario where the collapse of the euro creates a spike in dollar value (triggering a subsequent collapse in PM prices).
We would like to provide you with additional thoughts regarding the euro down -> dollar up -> gold down scenario.
Generally, the market mechanisms would work in the above-described way if we assumed that the value of gold in euros couldn't change. In this case, if the value of the dollar increased against the euro it would have to mean that its value against gold would also increase. In other words, the value of gold in USD terms would therefore decrease.
However, not only can the value of gold in the euro change – it may also rally significantly.
Now, if we assumed that the value of gold in euros moves much higher ceteris paribus (all other things unchanged), then the above implication (euro down -> dollar up -> gold down) loses its reliability.
Let's take a look at a simple situation:
Gold in euro moves up by 100% from 1,000 to 2,000.
Dollar goes up against euro from 0.7 to 0.9 (meaning that 1 dollar used to buy 0.7 euro and now it buys 0.9 euro).
What impact does it have on gold priced in dollar?
At the beginning, gold traded at $1,429 (1000 / 0.7) and now it trades at $2,222 (2000 / 0.9), which means that it increased by about 56%.
So - we have an increase in the value of gold in both: USD and EUR, which means that gold increased its value against the U.S. Dollar while the Euro decreased its value against the U.S. Dollar.
Of course, the numbers above are just hypothetical, and everything depends on the sizes of the respective rallies/declines, but the above example clearly shows that a decrease in the value of the euro (against the dollar) does not need to translate into a lower price for gold.
At this moment, it's not surprising to see European investors purchasing gold in response to their economic problems. Yes, there will be investors willing to purchase dollars as a safe-haven (which we find rather ironic), but some may be willing to purchase gold and silver.
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