Currency Intervention’s Impact on the Price of Gold (GLD, IAU, FXF, ERO, DRR)

Currency traders really don’t like governments to intervene in the global currency market. Such moves tilt the playing field in unexpected ways that can cause traders to unwind positions that would have paid off if the intervener had just stayed out of the picture.

Since the beginning of September, when the Swiss announced their peg to the euro, the CurrencyShares Swiss Franc Trust ETF (NYSE: FXF) has lost nearly -9% of its value and the EUR/USD Exchange Rate ETN (NYSE: ERO) has lost nearly -3%. On the gold side, the SPDR Gold Trust (NYSE: GLD) and the iShares Comex Gold Trust (NYSE: IAU) are both down about -2%. The Market Vectors Double Short Euro ETN (NYSE: DRR) is up more than 5%.

This Swiss peg to the euro forced traders to move out of the franc to the US dollar and the Japanese yen. Japan, which has been trying to depreciate the yen since earlier this year, has not reacted yet, but the safe haven status of the yen has strengthened since the Swiss move, which is not what Japan has been aiming for. And then, there’s gold.

When the US announced that it would make more US dollars available to the European Central Bank, the euro fell and the dollar rose. The effect was to push gold prices down, but that didn’t last long. Now that the world’s safe haven currencies — the Swiss franc, the US dollar, and the Japanese yen — look set to begin a currency battle, gold is the obvious retreat for investors looking for a safe haven.

The dollars that the US Federal Reserve has sent to the European Central Bank have boosted investors’ appetite for risk and somewhat cooled the search for a safe haven. That gold prices are weaker than could be expected indicates that the currency interventions have done their work, but it is not likely that lower gold prices are going to last through the end of the year.

The trend in the betting is against the euro more than it is in favor of the dollar, the franc, or gold. Investment management giant Pimco is betting that the euro will fall against the dollar to $1.20 by the end of the year, from its current level of $1.38. Yesterday’s intervention only strengthened Pimco’s case.

With the world’s governments fighting off currency appreciation at every opportunity, the euro is the likeliest to continue falling. The sovereign debt problems have not been solved and the ECB still doesn’t appear willing to accept the obvious weakness of the eurozone’s banks. Gold prices are most likely to wobble around $1,800/ounce for a while before turning upward again. When the world’s soundest currencies kick off a war, gold’s value as a safe haven can only rise.

Paul Ausick