Monday, March 1, 2010

Greek Crisis Impacts World Currencies and Gold

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

News out on March 1st indicates that France and Germany would be willing to buy $41 billion in Greek government bonds to prevent a default. This is not the first scheme to be reported for a proposed bail out of Greece and it probably won't be the last. Based on the trading patterns of all the major European currencies and the U.S. dollar, markets have yet to be convinced that the situation is going to have a happy ending. Gold, which sold off during the Greek Crisis, just as it did during the global financial collapse in the fall of 2008, is currently in a sideways trading pattern.  The commodity-based currencies are holding up quite nicely.

The crisis in Greece exists because there is a 12.7% budget deficit to GDP ratio in the country, which represents 2% of the euro zone economy. Money has flowed out of Europe and European currencies to the supposedly more stable U.S. dollar.  Based on last week's GDP revision, the U.S. had a GDP of $14.258 trillion in 2009. The U.S. has an estimated budget deficit of $1.6 trillion this year, which would give it a deficit to GDP ratio of 11.2%. This is only a little better than Greece and much worse than the euro zone overall. Nevertheless, massive amounts of money have flowed out of European currencies, not just the euro, and into the U.S. dollar.  The safe haven aspect of the dollar is based on America's potential for printing unlimited amounts of new money - something that ultimately destroys the value of a currency - not its financial condition. Greece can't print its way out of its predicament because it is part of a currency union.

The euro has been pounded - both literally and figuratively - during the crisis, along with the British pound and even the vaunted Swiss franc. The classic technical sell signal of the 50-day moving average crossing and moving below the 200-day moving average took place on February 4th for the pound, February 11th for the euro, and February 26th for the Swiss franc. The Swedish krona has so far managed to avoid giving a sell signal, but is close to doing so.

The major destination for the money flowing out of the euro has been North America. The U.S. trade-weighted dollar gave the classic buy signal of the 50-day moving average crossing and moving above the 200-day on February 19th. The overall technical picture of the rally is strong, just as the overall technical picture for the euro is weak. Moreover, there is no indication that a sudden change in the bullish or bearish picture is likely in the immediate future. The major currency with the second best technical picture is the Canadian dollar, which unlike the U.S. dollar has a longer-term bullish technical picture.

The Australian dollar, which is essentially a stand-in for gold, has also maintained its technical strength during the Greek crisis. Australia has the highest interest rates among the industrialized countries and its currency should be considered the most reliable in the world. Gold itself is currently basing in a sideways pattern and its rally is intact. Gold selling off in during a crisis is historically unusual. Money has always flowed into gold during political turmoil. There was a big rally after 911 for instance and some gold stocks actually went up during the 1987 crash. Gold selling down now indicates that the problem with the global financial system that appeared during the Credit Crisis hasn't been completely fixed yet. The next time a central banker claims otherwise, suggest they take a lie detector test. 

Disclosure: No positions

NEXT: The Outlook for U.S. Treasuries

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.