Gold News

Euro Collapse, Gold Surge

Political unrest & financial crisis drives European investors to Buy Gold...

THE EURO has suddenly become a risky currency, writes Gary Dorsch of Global Money Trends, since the financial crisis in Eastern Europe could rival the destructive power of the US sub-prime debt bomb.

Western European banks have an estimated €1.6 trillion extended in Eastern Europe, two-thirds denominated in Euros and Swiss Francs, to borrowers whose incomes are paid in Hungarian Forints and Latvian Lats, and already stretched to the limit.

The Polish Zloty has dropped 29% against the Euro, the Hungarian Forint is 20% lower, the Romanian Leu down 17% and the Czech Koruna is 12% lower against the Euro, since the September collapse of Lehman Brothers, making their debts unaffordable and subject to default.

Emerging European currencies plunged on March 2nd, led by a 2.5% drop in the Hungarian Forint, after a summit of European Union leaders rejected a €180 billion bailout plan for the region.

The EU summit participants were unable to agree on any concrete measures to deal with the European credit crunch, the much-feared collapse of east European banks, or a pan-European stimulus program.

Hungarian president Ferenc Gyurcsany warned that failure to offer bigger bailouts "could lead to massive contractions in eastern economies and large-scale defaults that would affect Europe as a whole."

The result, he continued, would be increased political unrest and immigration pressures.

As such, investors have turned to gold as a "safe-haven" hedge against the possible default by Western European banks or emerging nations on their outstanding debt. Since July, the yield on Hungary's 10-year bond has soared from +335-basis points over the German bund, to +845-bp today.

Likewise, the Gold Price has been closely tracking the yield spread, reaching a record 230,000 Hungarian Forints per ounce last week.

Simply adopting counter-intuitive logic, however – that negative data on the US economy is bullish for the Dollar – still leaves the currency trader without the key explanation as to why a depression is bullish for the greenback.

GARY DORSCH is editor of the Global Money Trends newsletter. He worked as chief financial futures analyst for three clearing firms on the trading floor of the Chicago Mercantile Exchange before moving to the US and foreign equities trading desk of Charles Schwab and Co.

There he traded across 45 different exchanges, including Australia, Canada, Japan, Hong Kong, the Eurozone, London, Toronto, South Africa, Mexico and New Zealand. With extensive experience of forex, US high grade and corporate junk bonds, foreign government bonds, gold stocks, ADRs, a wide range of US equities and options as well as Canadian oil trusts, he wrote from 2000 to Sept. '05 a weekly newsletter, Foreign Currency Trends, for Charles Schwab's Global Investment department.

See the full archive of Gary Dorsch.


Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals