Gold detaches itself from the euro

Since 2002 gold has been locked in a range of 315-350 euros to the ounce, and has only risen in value on dollar weakness against the euro. But in the past weeks this umbilical cord has been torn apart, and both the dollar and gold have strengthened against the euro.

The euro is suffering for several reasons: the growth outlook in the euro-zone is poor; the rejection of the European Union constitution by French and Dutch voters leaves the EU in a state of paralysis; and there have been hints that euro-zone interest rates will be cut soon.

Now for central banks or fund managers looking to diversify risk this has made the euro less attractive, and with the dollar also not without its own problems, gold is an alternative store of value.

Gold is an alternative 'currency' to the dollar, although it has to be admitted that gold has a zero yield and is a far less liquid asset. However, gold does have one fundamental feature that other currencies lack. Its supply is limited, and can not be expanded by the printing of money by central bankers.

In a world where deficits and debts hang over economies like the grim reaper, gold shines as a bastion of immortality. For their will be no deflation of gold due to a rising supply of paper money. On the contrary the more money is printed the higher gold will rise in price.

As the ultimate hedge against financial insecurity gold is still unmatched, except by other precious metals like silver and platinum. But its recent role as a proxy for the euro has kept the yellow metal from sharing in the recent global upturn in commodity prices.

This significant undervaluation of gold as an asset is now likely to come under focus, and accelerate movement into what is already an increasingly obvious safe haven. If gold were to resume its old role as a proxy for oil, then speculators would certainly take renewed interest.