Traditionally investors in gold have used this precious metal as a safe haven at times when risk aversion is at its highest and therefore, fears regarding inflation and the security of the US economy have historically driven its price up. Owing to this it has exhibited a strong inverse relationship with movements in the US dollar on foreign exchange markets until recently when, due to several factors, this longstanding relationship has started to turn on its head.

The main reason for this according to analysts is the bleak economic outlook in the EU. Worries concerning the stability of the Euro, as four or five countries in particular look to be in dire need of financial aid, have resulted in a decline in this currency’s value against both the greenback and gold. Greece is causing the most concern with no details of a concrete rescue plan yet to emerge although there had been some vague releases on a potential plan or guarantee of debt about a week ago.   

These uncertainties, along with Dubai’s plans to restructure approximately $22 billion dollars of debt if it can reach agreement with its creditors have led to the dollar becoming a more appealing alternative in which to hold assets than other major currencies. At the same time money is still pouring into gold due to the sluggish recovery in the global economy in general.       At the heart of the new trend are questions over the long term viability of the Euro itself. Since its inception the resulting Euro-zone bond market benefited the poorer members of the EU as it enabled them to borrow at roughly the same rates as the stronger nations such as Germany. However, since the worldwide financial meltdown intensified during the last quarter of 2008, investors began to demand a higher rate of return from those countries with unhealthy budget and trade deficits.

 Instead of the intended convergence of interest rates in the Euro-zone under the umbrella of the Euro then, a situation has arisen where they have diverged by considerable margins as far as government borrowing is concerned. The difference in yields on bonds issued by Germany and those issued by Greece is wider now than it has been since the single European currency was first introduced, although it has narrowed slightly in the last few days as hopes of a bailout rose.      This situation has resulted in the Euro losing ground to the tune of almost 5% against the dollar in 2010, whilst the continuing flight into gold has meant that this commodity has increased in value by over 4% in the same period, in Euro terms (as illustrated in the graphic below). The ongoing doubts as to whether or not the EU can put together a package to turn things around is likely to see the continuation of this new trend for the foreseeable future.

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