Wall Street took a beating today, as did markets in Asia—and Europe, of course. It was political turmoil in Italy that sent waves of uncertainty sweeping around the world.
For what it’s worth, I don’t know anyone in finance in Europe who thinks the EU will break up. I do know American observers who’ve been saying it will happen. Personally, I don’t care to make a prediction. But if it does happen, I think it will be a slow-motion train wreck that will take years to unfold.
This doesn’t mean that Italy—or other weak links in the European chain—can’t cause plenty of turmoil, just as things are. We saw that in spades today.
But the really interesting thing to me was gold’s behavior during the day. It was more like a yo-yo than I can remember seeing in one day.
Why?
Well, the euro took it on the chin and the US dollar rose. Gold is priced in dollars. There are gold trades who seem to have a knee-jerk reaction to sell gold every time the dollar goes up. But we’ve seen many times over the years that when European markets turn fearful, a lot of participants turn to gold as a safe haven. This would explain why gold moved up sharply before the US markets opened, then dived…then moved back up again as Europeans took advantage of the sale prices.
The key takeaway here is that a higher dollar is not always bad for gold, as some people think. If the reason for it is acute fear and pursuit of safety, gold and the dollar can both rise at the same time.
And I do think we’ll see times like that frequently, going forward.
