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Investors who are concerned about the possibility of default on government bonds will experience a strong urge to own some gold. Government bonds (any government) are pieces of paper and nothing more. Gold on the other hand is real and you can touch it. Gold is everlasting. It cannot be easily be destroyed, has no shelf life and is something that is respected the world over as a store of value. Government bonds, like all investment vehicles have their advantages and disadvantages. Government bonds pay interest which means that you can earn a positive return on your investment over time. This is an advantage that gold lacks. Gold pays no interest and there is not reason to own it other than speculative reasons, or if you are presently experiencing the emotion of fear in connection with the outlook for income producing assets such as government bonds.

At the time of this writing there are serious concerns on the minds of global institutional money managers. These concerns are related to sovereign government debt loads and whether these nations can actually pay back all the principal plus interest owed on the bonds that they have issued. Foremost on the minds of these investors is Greece, a country in the European Union that possesses an economy about the size of the State of Wisconsin. Presently, the Greek national debt stands about roughly 125% of Gross Domestic Product making it the highest leveraged nation in the European Union. Because of this Greece is regarded by international money managers as the most "at risk" European country in connection with the possibility of a default on its debt. Because of this Greece has been the focus of several rounds of debt refinancing and restructuring activities beginning in 2010, and continuing to the present time. Any casual glance at the recent chart of gold prices will easily confirm that as the uneasiness surrounding the Greek debt crises rises, so does the price of gold. This reflects the sentiments as outlined in the above paragraph. International investors tend to move their money into gold when they feel a need to take it out of sovereign debt.

Why this matters to you.

As a Forex currency trader you are forever exposed to the risks and opportunities brought about by the economic affairs of nations. You may never have any need or desire to speculate one way or the other on the Greek economy or Greek government bonds, but you cannot every escape the effect that the Greek (or any other) economy has on your current and anticipated currency speculations. Greece is part of the European Union, and even if were not, the nations that it trades with are because of simple geographic reasons. This means that even if Greece were not in the EU, your future Euro/USD trades will be impacted by what happens in the gold market vis-a-vis the euro, and the Greek government bond market. Because of this, you need to be armed with at least some basic information concerning these relationships and how to think about them. We should consider that these relationships should be characterized by us as part of our inter-market analysis.

To put it very simply, it is convenient for us to think about the global economy as a closed plumbing system full of different liquids of different densities where one of those liquids represents money, and the other liquids represent financial assets that can be purchased or traded for that money. In this way it is easy for us to mentally visualize one or more of those liquids "leaking" into and out of certain parts of our closed system. So, if we notice gold for example gold is "leaking" into or out of one part of our global system, it should prompt us to ask ourselves why, and at the same time ask ourselves what it is displacing, or what it is being displaced with. When we train ourselves to think like that we automatically give ourselves an advantage over other traders that do not think this efficiently so to speak.

To benefit from this line of thinking we just need to know a bit about the relationships between the various financial assets that are commonly traded throughout the global economy. If we knew that Greek government bonds are under pressure because of an increase in their debt-to-GDP ratio, and if we know that Greece is part of the European Union, then we can assume that pressure on Greek bonds can possibly translate to downward pressure on the Euro of course, but against what other currency? Well, since we began this piece with a statement underscoring the upward move in gold, then we can assume that it is possible that gold has been benefiting from the increase in Greek government bond yields, or put another way, a flight to "quality" after exiting Greek bonds. If we already knew that the Swiss Franc is one currency that often benefits when gold goes up, then we can easily put together the puzzle to discover that best trade to make if we intend to short the Euro. It would be to sell the Euro against the Swiss Franc, which is exactly what as our little exercise in inter market analysis has called for.

Jeff Webb
Forex Conqueror

By Jeff Webb
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