Gold vs. Euro: XAU/EUR

The Euro is the world’s second most used currency behind the U.S. dollar. The currency has been printed and used by a bloc of European countries since 2002. The two countries at the core of the 19-member bloc are Germany and France, given the size and influence of their economies.

Euro currency symbol.

Because of differences in the characteristics of individual countries within the eurozone — the term given collectively to nations of the European Union — strong disagreements over monetary policy have strained relations between member nations. Generally, the Germans, who carry a very strong influence within the bloc, have been in favor of tighter monetary policy to prevent inflation, whereas Southern European nations have been in favor of a looser monetary policy to combat deflation and slow economic growth.

Due to concerns about deflation plaguing the eurozone and affecting Germany and France, the President of the European Central Bank (ECB), Mario Draghi, has embarked on an ambitious quantitative easing (QE) program similar to the Federal Reserve of the United States, involving the monthly purchases of €80 billion of sovereign and corporate bonds to reduce interest rates and combat deflation. This has been met with great consternation from Germans, given their historical fears of inflation, largely rooted in the disastrous hyperinflation of the 1920s Weimar period. According to Draghi, the ECB’s target inflation rate is 2 percent, which is considered ideal for economic growth and health.

Moreover, Draghi and the ECB have embarked on an ambitious plan of driving interest on bank deposits negative, so that people are charged to keep money in the bank. The idea is to discourage savings and promote spending to combat deflation. This, too, has been met with sharp criticism from the public and some economists, who believe that discouraging savings is economically detrimental in the long run. In March 2016, the deposit rate of the euro bloc stood at negative .4 percent.

As a result of these efforts to cheapen the euro and stimulate inflation, gold has been steadily rising against the euro. Since 2006, around the time that the real estate market peaked, the price of gold has risen from under €500 to over €1,100. However, there has been great volatility since that time, with gold plunging from €1,375 to under €900 between October 2012 and January 2014. These movements suggest that long-term gold investors should not panic during market corrections due to gold’s inexorable rise over time. Conversely, the market volatility due to uncertainties in the eurozone and the global market creates opportunities for short-term traders to profit.