Why the Gold Price Expressed in Euros Is Beating its Historical Record

Published by Philippe Herlin | Sep 5, 2019 | Articles 8416

A fundamental event went unnoticed last week: expressed in euros, the price of an ounce of gold surpassed its historic record from October 4, 2012 (€ 1380). We are evolving to € 1400 on September 4th. No one mentioned it because economists and the media only take into account the price of gold in dollars, which, at $ 1537 on September 4, is still far from its record of $ 1,908 on August 16, 2011. This difference is explained by a weak dollar against the euro between mid-2011 and mid-2012.

However, we are in Europe: prices, our salaries and our savings are denominated in euros, so it is the price of gold in euros that must be taken into account. So how do you explain this gold fever? By a significant decline in the euro against other major currencies? This is not the case, so we have to look for an internal cause.

The price of gold remained above € 1200 between mid-2011 and the first quarter of 2013 and then fell back to around € 1000 until September 2018, from which date it began a strong rise, in which we are still in. During this period, Europe struggled in a sovereign debt crisis affecting Greece, as well as Ireland, Portugal and Spain. A disappearance of the euro is mentioned by several commentators, so it is not surprising that gold then remains at a high level, nor that it will then fall back when the crisis will be resolved (seemingly) with aid funds and a banknote plate from the European Central Bank.

However, there is no sovereign debt crisis at the moment – on the contrary – since zero rates make the budget deficit and debt painless. So how do we explain this increase in the price of gold? In our opinion, we must turn to a sector that receives little media coverage : that of European banks. To get a synthetic and accurate picture, what better way than to look at the EURO STOXX Banks (the stock price of the major European banks) over 10 years: it’s catastrophic! The price goes through a higher point at 240 points, then collapses three times. We are at 80, a division by three, and a clear downward trend.

This is the source of the problem, which is silent this time, unlike the Greek crisis: the major European banks. Some are worse off than others (the Italians, the Greeks, the Spanish, Deutsche Bank), but those that do not cause concern in the specialized press, such as French banks, pale in comparison to their American counterparts. Because the latter have made a real effort to restore their accounts and their leverage effect is around 1/10 (one dollar of cash for 10 of commitment) when European banks are around 1/30… Investors are not fooled and they remain far from these values, hence a massacred stock price. The ECB, which is unable to get out of the zero rate rut, is of course adding to the concerns.

For once, the next financial crisis may come from Europe and not from the United States, as we explained in January 2018, and this prognosis seems to be confirmed. Faced with this threat, the best protection is gold, of course, and obviously more and more people are telling each other and taking action.

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