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Will gold prices extend their falls or is there a buy opportunity? Simon Smith of FxPro looks at the recent behavior and sees there could be more of a shake-out to come.

In the interview below, Smith also discusses the international pressure on Japan regarding the weakness of the yen, the anti-euro party in Germany and other topics moving the markets.

Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining  FxPro  in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital.  He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International.  Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

  1. Japan faces some international pressure regarding its policy. Can this change the course of the yen or is it only a correction before the next drop?

I don’t think the international community are likely to publically get in the way of a weaker yen. They appeared to reach a compromise at the February G20 meeting and it has been noticeable that there have far fewer comments from officials on the yen and in particular, references to its value since then.   The yen has been good to the international community in recent years, taking the strain from the euro, dollar and sterling during the global financial crisis.   I think they realise they cannot have it all their way and the importance globally of having Japan escape from its current deflationary trap.

  1. Can the recent fall in the price of gold continue or is it just a better buying opportunity?

I’ve never been the biggest fan of the gold over the past year. The money debasement argument was not holding water and it was clear that some of the more traditional correlations and relationships were breaking down.   Furthermore, when I hear and meet people who put nearly all their pension into a single asset it doesn’t give me faith that they are thinking rationally from a risk and diversification perspective.   And this leads to increasingly fraught rationalisations as to why it’s going to continue moving higher. The dollar gold price peaked 19 months ago, global holdings of gold in ETFs peaked 4 months ago and I think there could be more of a shake-out to come.

  1. The anti-euro party in Germany is gaining traction following their inaugural event. Anti-bailout sentiment had an impact on the German policy on Cyprus. Can we expect Merkel to take a tougher approach towards the September elections?

I think it’s a given that we’ll see the line toughen.   Merkel enacted plenty of U-turns in the early part of the crisis, which damaged her reputation.   The issue is that showing exactly where the line in the sand is not always easy and the near-term costs of doing so on the periphery will no doubt cause more upsets, be it denying a further extension to Cyprus or softening bailout terms elsewhere.   The common feature that Merkel and other politicians face is that doing the best thing for the Eurozone is often far from the most politically acceptable thing domestically and that’s where the votes come from.

  1. There is talk in Europe about cancelling the 500 euro bills, which are often associated with organized crime. Can such a move bring more cash into the real economies of the euro-zone?

It would have an impact, although knowing quite what it would be is not easy to compute. The thinking is that they are used as a store of value for organized crime etc., so phasing them out would undermine this use, meaning more are recycled into the real economy.   Some are held beyond the Eurozone, so the impact on the Eurozone economy if they were phased out could be limited, but it’s clearly not that easy to compute the impact given the uncertainty of where they are held and by whom.   That said, with 500 euro notes accounting for nearly one-third of euros in circulation, if they were phased out, it would become a big topic and more ‘research’ will no doubt be done.

  1. Chinese GDP fell short of expectations and so did other key economic figures from the economic giant. Apart from the immediate effect on the Australian dollar, can we expect further impact on currencies in the longer run?

I think we’ve already seen the impact happening in recent months.   Currencies in general have become less correlated to events in China and the Aussie itself is trading far less like a commodity currency.   The correlation between the Aussie and global metals prices is half the level that was prevailing in the middle of last year.   Having said that, it will make it harder for the Aussie to sustain current levels, or at least to continue the appreciation seen in recent years.   But ultimately this is a good thing, because it was naïve to think China could sustain 8% growth rates forever and that it would be a positive for the global economy for it to do so.

Further reading: the previous interview with Smith:  The BOJ can do quite a lot to weaken the yen