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EU Joins Currency Race to the Bottom

Written By Brian Hicks

Posted May 17, 2010

Business is booming for gold dealers in Euroland. Most coin sellers are completely out of gold, and they’re starting to run low on silver, too.

The reason?

This month, the European Central Bank (ECB) made a historic decision — stupid and short-sighted, but historic nonetheless…

They decided to join Bernanke’s money-printing orgy, gobbling up bonds and cutting interest rates to near zero.

The ECB’s initial claims are that its version of QE will be “sterilized” — meaning that for every euro printed, one would be removed from the system.

But that wouldn’t be a very effective way to print money, would it?

We’ll see if these so-called “sterilization” measures go into effect.

European finance officials are justifying their actions as a way to both defend the euro from further decline and fend off evil speculators.

If currency markets are any indication, they’re failing in that mission so far. Since the plan was announced, the euro has dropped almost 5% against the dollar.

Doubts about the EU’s future persist… and may have gotten even worse.

The Motive

The real force behind this QE wasn’t a push to defend the euro; that obviously hasn’t worked.

It’s really just another bank bailout in disguise.

Banks worldwide — especially large European ones, like Deustche Bank — hold lots of debt from dodgier EU nations. As the value of these bonds plunged, the capital ratios of big banks deteriorated.

And as we know, it would be unfair to “punish” anyone for making bad loans. That would be far too laissez-faire for today’s bank-welfare system.

Come on in, the Water’s Fine

Europeans are right to be concerned about their shared currency. Healthy economies don’t need to resort to quantitative easing, sterilized or not.

That’s why Germans are flocking to gold and silver.

The ECB has dipped its toe into the QE pond. And once these things get rolling, they are very hard to stop.

Before you know it, the ECB will be splashing around with Bernanke and Geithner in the QE pool — printing up a billion here, a trillion there.

If the ECB doesn’t go the true QE route, Southern Europe is destined for some very hard times ahead…

In either case — inflation or economic apocalypse — precious metals will offer protection.

Strengthening the Case for Precious Metals

Thus, the case for gold is getting stronger every day. With the world engaged in a currency race to the bottom, it’s one of the few investments that makes sense.

Some are calling for an end to gold’s run…

“Gold is a worthless druid metal,” they say.

“How much interest does your gold pay?” they ask sarcastically.

Ignore these pundits — they’re clueless.

Gold is not close to done yet. If this were a baseball game, I’d say we’re in the third inning.

Just look back at the 70s. In 1971, when Nixon closed the gold window, it traded at $35/ounce. By 1974, it had risen to $195/ounce. In 1980, gold hit $850.

This chart best tells the story:


$35 to $850 — that’s a 2300% increase in less than 10 years.

Compare that to the current gold bull market, where we’re only up around 300%; it gives you some idea of how high gold prices could go.

Yes, the 1970s were a unique time in currency and precious metal markets… but today’s events are arguably even more unprecedented.

We’ve never had interest rates this low for this long. The Fed has never printed so much money before.

Eventually, the time will come to sell gold. But we’re not there yet… not even close, in my opinion.

What I’m saying is that if you haven’t invested in gold yet — it’s not too late. My favorite ways to play it are physical bullion (Canada’s .999% Maple Leafs are nice) and junior miners.

If you own physical and junior miners, you get the best of both worlds. Bullion gives you security, and junior gold plays give you that homerun potential.

Our own Greg McCoach is arguably the best in the business when it comes to picking small gold miners. If you’re interested, check out his latest report. He’s calling it the “greatest gold find of the last 50 years.”

When McCoach says something like that, I pay attention.

Until next time,

Adam Sharp
Analyst, Wealth Daily