Am I saying that European banks are broke? I can’t say that. I can say, however, that the European Union’s law forbidding taxpayer bank bailouts goes into effect at the start of 2016. When people consider the new law alongside the recent past (i.e., depositors losing 1/2 of their money in Cyprus banks) and the not-too-distant future (i.e., Austria ends government insurance for bank deposits in July), one can see why currency proxies like gold may start to shine.
There are other reasons why gold can recapture the public’s imagination. It tends to outperform other assets when fears of deflation become pronounced. High profile gurus such as Jeffrey Gundlach contend that the prospect of ever-falling prices are pushing investors toward accepting a small loss on government bonds. If investors are as worried about a deflationary spiral spreading across Europe, in spite of central bank stimulus efforts, they might also be attracted to the perceived safety of the world’s most renowned precious metal.
Granted, the greenback is the currency superstar for the time being. Its strength makes it difficult for GLD to gain significant traction. On the other hand, if data for the U.S. economy continue to miss expectations as we get deeper into May and June – if the notion of a temporary bump in the 2015 road gives way to signs of widespread deceleration – GLD would get a bona fide lift.
One way to assess whether or not gold (in dollars) has any legs is to track the SPDR Gold Trust (GLD):PowerShares Dollar Bullish (UUP). price ratio. If GLD:UUP can break above and stay above an intermediate-term 100-day average, I’d have greater confidence in the precious metal’s ability to outperform competing asset classes like stocks.