How do gold and the HUI relate to the EURO?
Enquiring Mish readers might be interested in that question so let’s take a look.

$HUI Weekly

Euro Weekly

Monthly Gold

One would have to say that is a pretty strong correlation but what is the driver? Given gold’s know relationship to the US$, the easy answer is the Euro. Indeed with the Chinese official peg of the RMB to the US$, and with the Japanese unofficial peg to the US$, the Euro has born the brunt of the huge slide in the US$ index. But where do we go from here?

Short term we appear to be tracing out a top on all three charts above. Long term I am very bullish on gold and bearish on the US$ but perhaps we are in for a considerable period of consolidation in gold, the US$, and the HUI, which will be frustrating to bulls and bears alike.

“Is there a fundamental basis for that opinion?”
Enquiring readers might be pondering that question. It just so happens that there is. Here goes:

1) The Fed Fund interest rate in the US is now up to 2.75% while the rate in Europe is now at 2.00%. That differential favors the US$.

2) Money growth in the US is slowing. As long as the FED is tightening and attempting to hold money growth, the US$ is likely to find support.

3) There are more than a few signs that Europe is headed into a recession.
Manufacturing data add to eurozone gloom. In addition, unemployment in Germany is close to 12% and growth is decelerating in Germany, France and Italy. EU GDP growth is barely at +1.5% and it seems to be slowing.

4) Europe for all practical matters just scrapped its Stability Pact. Since inception of the Euro, countries were not allowed to have deficit spending greater than 3%. The EU now has a license to spend under the guise of stirring growth and beating the economic cycle. Just to show you how silly the discussion was, the EU’s newest president (Junker) proposed defining “good times”. “Clearly, we are going to have to define good times”. Apparently it is permissible to spend more in “bad times” as if any country on earth is going to save in “good times”.

5) Boston Fed’s Minehan is nervous about inflation. Gold clearly thrived when the FED was worried about deflation. Now the Fed seems hell bent on worrying about the inflation they created. Greenspan, Minehan, Poole, and others are finally on the “inflation bandwagon”. Given their collective pathetic track record, gold bugs should have a cause for concern (that they are very likely to over tighten).

6) Gold is seasonal. It tends to do best between August and January.

7) In the latest bit of total silliness, the ECB announced today that it is selling gold: ECB sells 47 tonnes of gold. “The ECB gave no explanation for its unexpected decision, except to point out that it was entitled to sell the gold under the Central Bank Gold Agreement, renewed in 2004 for another five years. Although the ECB said it did not intend to sell more gold in the first year of the agreement, which ends on September 26, it refused to say whether it might sell gold after that date. One central banker said the ECB planned further sales.”

8) For additional reasons why the US$ may bounce see The Incredible Shrinking Dollar.

I suppose if you want to debase your currency, selling gold would be one way to accomplish the mission. This announcement prompted “SuisseBear” on the Motley FOOL to write “Unlike the Brits, at least they’re not selling at the absolute bottom ;-)”. Brian responded “Could somebody tell me why a central bank, an organization that can create any amount of cash it wants out of thin air, would sell gold for cash?”.

Now that’s a good question! Why bother selling gold when you can just print more money? I am not sure how high gold prices can reach, but I will say is that random dumping gold at these prices seems just plain incompetent.

With the FED hell bent on hiking until they break something, there should be support for the US$. There certainly is rampant speculation in housing, oil, stocks and other things. Unfortunately for the FED, job creation is pathetic. It takes 150,000 jobs just to keep up with population growth. We are three years into a “recovery” and we are barely creating jobs above a break even pace.

It is very, very likely that the FED will indeed break something, perhaps multiple things, as in housing, the stock market, junk bonds, IPOs, etc. Let’s see how long the FED can keep this going. What the FED does not realize is that once housing turns, it will be gone for good.

By the time the FED figures that out, they may well be taking back these rate hikes at a pace that is decidedly “not measured“. I suspect that there is a good chance that may start just about when the seasonality factor starts looking good for gold. In the meantime, IF the FED keeps hiking, look for continued consolidation that frustrates gold bulls and bears alike. However, once the FED pauses, the buy and hold signal for gold will be back on, this time for good.