Buy gold to protect against currency destruction being unleashed in Europe

Gold has been struggling lately in part because of a stronger dollar. But don’t believe that strength is based on fundamentals, according to well-known gold guru George Gero, a vice president at RBC Wealth Management.

“What’s a real conundrum is with a 2.48% 10-year interest rate, you have a strong dollar,” he told Fox Business on June 2. “And when you have a strong dollar, you tend to have weak gold. And you have a strong dollar because the other currencies are being debased, such as the euro. … This is the first time we’ve seen a 2.48% interest rate and a strong dollar. The dollar isn’t strong because of the fundamentals of the dollar. It’s strong because of the weakness of the euro, because (European Central Bank chief Mario) Draghi and the others are pulling the euro down because they need business, they need exports, and so a weaker currency helps them try to come back up into a better economic recovery than they’ve had. Only Germany has been doing well.”


This Thursday’s meeting of the ECB is expected to launch a major cannon shot in the ongoing currency wars and will be another gold-buying catalyst, Gero predicted. Although it’s not expected to engage in full-blown U.S.- or Japanese-style quantitative easing, it IS expected to take the unprecedented step of imposing a negative deposit rate, in addition to slashing its already record-low benchmark interest rate.

“Analysts expect the ECB to introduce a negative deposit rate, meaning the central bank would charge lenders to hold money with it overnight,” London’s Telegraph reported. “Such a measure has never been introduced by a major central bank.”

ECB policymakers are desperate to generate inflation, which slowed more than forecast in May.

The lack of inflation is “a surprise, but not enough of a surprise to change materially the global economic outlook that the ECB will release on Thursday,” Societe Generale economist Michel Martinez told Bloomberg. “What seems highly likely is that the ECB will cut key rates and probably also inject further liquidity.”

“Many economists say that inflation is already well below the danger zone for tipping into deflation, and some analysts have taken to calling the condition ‘lowflation,” reported The New York Times. “Deflation, spurred by falling wages and depressed consumer demand, hits borrowers by raising the real value of loans, and has the potential to weaken Europe’s fragile financial sector.”

And it’s not just Europe being pulled into currency devaluations. With its juggernaut economy slowing down, China also is said to be considering quantitative easing.

“China’s central bank is exploring direct purchases of bonds and other assets to support key sectors of the economy in case the slowdown deepens,” reported the Telegraph, citing the China Securities Journal. “It is the first hint of quantitative easing in China.”

And it’s a vicious cycle: As other currencies weaken, the U.S. in turn could be forced to keep the pedal to the metal on its easy monetary policies. Euro Pacific Capital chief Peter Schiff thinks that could be the case, especially if the stock market runs into trouble under the current Fed policy of tapering, or winding down, its QE stimulus program.

“If the Fed actually did what it’s threatening to do, which is to completely remove all the monetary props beneath the market, to wind down QE to zero and then eventually begin to increase interest rates, then I think the market will head substantially lower,” he told Yahoo! Finance. “But I don’t believe they’ll do that. I still think the Fed is going to end up aborting the taper which will support the market and prevent it from really collapsing.”

The continuing round robin of currency devaluations doesn’t paint a pretty picture of the global economy. In the meantime, gold is oversold and so far holding up near $1,250 as of Tuesday afternoon.

“I think we have to many bears in the woods,” RBC’s Gero said in forecasting gold’s resilience. “I think all the negatives have been priced into the market for now.”