DOW-GOLD RATIO COULD HIT PARITY
DIRECTOR OF CURRENCY RESEARCH, GFT
LAST Friday’s surprise commentary from Peter Szijjarto, a spokesman for the new Hungarian prime minister Viktor Orban, triggered yet another selling frenzy in the euro. He noted that the Hungarian economy was in a “very grave situation” and said that the spectre of a default “isn’t an exaggeration”. Although Hungary is not a Eurozone member, many Hungarians hold mortgages denominated in low-yielding Swiss francs. Szijjarto’s ill-considered remarks sparked a vicious sell-off in the Hungarian forint-Swiss franc pair, which pushed euro-Swiss franc lower and sent the euro to fresh yearly lows.
Hungary now becomes the latest problem for the beleaguered euro as traders grow concerned that the recent volatility in the region’s financial markets will now result in a significant slowdown in growth in the real economy. As the troubles for the Eurozone mount, the possibility of euro-dollar hitting parity becomes more viable every day.
However, while most investors continue to focus on the daily drama in euro-dollar, some analysts are beginning to consider a much more ominous parity – gold versus the Dow Jones Industrial Average (DJIA). At first glance, the idea of parity between the Dow and gold appears absurd. The Dow is currently trading near the 10,000 barrier while gold holds steady at a much more modest $1,215/oz. level. For the gold-Dow relationship to reach parity, the Dow would have to fall to 5,000 while gold would have to rise to that mark. Although such moves may seem preposterous, there is a historical precedent. In 1979 it only took 1.4 ounces of gold to purchase one share of the DJIA.
The Dow-gold parity argument rests on the supposition that the sovereign debt problem will become markedly worse as time progresses. I think that is accurate when you consider that the US debt burden will reach 100 per cent of GDP within 12 months. At that point, the dollar’s status as a safe haven currency could come under the same type of assault that the euro is currently experiencing. Then, the notion of Dow-gold parity will become a much more reasonable scenario as gold becomes the only safe haven bet.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected].