The general impression is that worsening Eurozone crisis can underpin gold by a major degree. But have you ever thought that the worst economic crisis of the modern age can in fact inflate gold and Dollar together, making null and void, the cardinal negative correlation between Gold and the world's reserve currency.
Euro, when it was launched was touted the next reserve currency by its architects; but when Greece cooked its books and problems of liquidity snow balled into problems of solvency, there began a capital flight: this means people who owned Euro used that to buy dollar sending it higher; but the accompanying uncertainty and continued easing measures ensured that gold too maintained its demand.
So while dollar gained against Euro, the former lost in relation to gold.
So what happens if Euro implodes?
This is not an unlikely scenario. The litmus test would be the elections scheduled in Italy where Mario Monti is resigning from his Prime Ministerial post even as Silvio Berlusconi is seeking a re-election to the post.
The ballets would announce if it really made sense for Italy to stick to austerity. If Italy ultimately decides to quit Euro, there would be no doubt that others on the periphery too would follow suite. Admittedly, the dynamics of this process is not as easy as it sounds and the whole scenario is peppered by many if-conditions. Seeking to probe them is beyond the scope of this article.
However, if Euro implodes, the torrent to dollar would gain strength; but not all assets would be invested in Dollar. A majority may get diverted to gold as well taking gold higher. Dollar may see gaining strength initially as investors abandon Euro, but the same Dollar would be spent on gold purchases.
In effect, gold would gain, so would Dollar, the former possibly outshining the latter in the long run.
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