FALLING EURO IS HURTING EUROPEAN ETFS BUT IS HELPING GOLD -- BULLION BREAKS OUT AGAINST THE EURO AND THE YEN
WHY EUROPE ISHARES HAVE BEEN FALLING ... While the major European stock indexes are at or close to new 52-week highs, it may seem puzzling to see European stock ETFs falling since March. Chart 1 shows the Europe 350 iShares (IEV) peaking in March and declining toward its 200-day moving average. The IEV/SPX ratio below the price chart shows the European ETF underperforming the U.S. stock market since that March high. In my view, the answer to the weakness in the IEV lies with the plunge in the Euro. Chart 2 shows the Euro forming a second peak during March before plunging to the lowest level in nine months. Remember that foreign ETFs traded here in the states are priced in dollars. That means that a foreign ETF does worse when its currency is falling and the dollar is rising (which is the present case). That also explains why European indexes (like France and Germany) look stronger when priced in their local currency. They look weaker when is quoted in a rising U.S. Dollar. That's one of the pitfalls of using foreign ETFs to take advantage of rising foreign markets. That strategy works better when the dollar is falling.
Chart 1
Chart 2
WHY FALLING EURO IS HELPING GOLD ... Another recent surprise is to see gold (and gold shares) rising while the dollar is rising and the Euro is falling. There may also be an explanation for that. Chart 3 shows the price of bullion quoted in Euros. It shows Euro-denominated gold breaking out to a new 52-week high. Chart 4 gives an even longer view of that relationship. It shows that gold has broken out to a new record high vs. the Euro after having been in sideways trading range since the start of 2002 (three years ago). One of the hallmarks of a true bull market in gold bullion is its ability to rise against all foreign currencies -- not just the dollar. The last time that happened was the 1970's.
Chart 3
Chart 4
GOLD ALSO HITS NEW VERSUS THE YEN... Gold is also breaking out against the Japanese yen. Chart 4 shows yen-denominated gold breaking through its late 2004 highs. Chart 4 shows that gold relative to yen is now trading at the highest level in ten years. That makes gold a lot more attractive to Japanese traders.
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Chart 6
GOLD TRIANGULATING IN CANADIAN DOLLAR TERMS... The next chart shows what gold looks like quoted in terms of the Canadian Dollar (which has been one of the world's strongest currencies over the last five years). The chart shows gold rising against the CDW until the start of 2003. Since then, it's been trading sideways in an apparent triangle which is normally a bullish pattern (see converging trendlines). Chart 8 shows the gold/Canadian Dollar relationship since the start of 2005. Notice that its price has jumped to the highest level in a month. That appears to confirm the view that gold is starting to gain upside traction against all of the world's key currencies. Even against the dollar.
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Chart 8
GOLD IS RISING IN THE FACE OF A RISING DOLLAR... Maybe most impressive of all is the ability of gold to rally in the face of a rising dollar. The daily chart shows the Gold ETF (GLD) having climbed back over its moving average lines and coming close to challenging its six-month down trendline. The five-year view in Chart 10 shows that bullion recently bounced off a rising trendline extending back to the start of 2002. Some skeptical market observers have taken the view that the rally in gold since 2002 has been a function of the falling dollar and not much else. The fact that gold is now rising against all currencies suggests that view no longer holds true (if it ever did). Gold's ability to break out against the Euro and the yen also suggests that the bull market in gold has global backing behind it. I continue to believe that this is an opportune time to increase one's exposure to the precious metals sector.
Chart 9
Chart 10
