When "No" Means "Yes"

The US financial markets hung out the "Closed" sign
yesterday in observance of Memorial Day, but the European
financial markets conducted a little business…
surprisingly little business. Stock investors did not seem
to care that French voters resoundingly defeated a
referendum to accept the European Constitution.

Currency investors, however, allowed their anxieties to get
the best of them. The euro tumbled nearly two percent after
the results of the referendum became known. The dollar, by
default, gained ground. If the euro’s popularity continues
to wane, we would imagine the slumbering gold market might
finally roll out of bed. In other words, gold might rally
decisively against BOTH the euro and the dollar, as all
major world currencies continue to lose credibility.

But first, a quick update on the French referendum over the
weekend…

"France and Europe reeled on Monday from a resounding
French ‘No’ vote that could sound the death knell for a
proposed constitution for the European Union," a Reuters
wire story reported.

"The charter, designed to ensure smooth decision-making in
the enlarged bloc, requires the backing of all member
states to enter into force."

Prior to the French defeat, nine countries representing
nearly half the E.U.’s 454 million citizens had approved
the constitution. But now that the French have turned up
their noses – even higher than they usually turn them up –
to the constitution, it stands little chance of becoming a
reality. And since there is no "plan B," the E.U. finds
itself in a bit of disarray. The euro, by association,
seems a somewhat less reliable a store of value than it did
last Friday.

"While the outcome was not seen jeopardizing the monetary
union that underpins the euro," Reuters hopefully surmised,
"leaders feared the expected political uncertainty could
hit investment and reform efforts."

We wouldn’t rule out that grim consequence…Throughout the
decades-long tussle between free-market economics and
closet-socialism within France, the French economy has
often stumbled away with a few bruises. This latest fracas
may have injured some neighboring economies as well…and
perhaps even the euro itself.

"Ah!!!!!! La France!" an expatriate French friend exclaimed
upon learning of the "non" vote. "It is exactly at moments
like this one that I feel welling up within me a surge of
tenderness for this nation, whose joyously idiotic
inhabitants make the same recurring errors, but always with
force, conviction and passion. And now, I anxiously await
the anticipated cataclysmic consequences. I tremble about
it, with a mixture of fear and amused resignation…My
country never changes, which is both its principal charm
and defect."

We, too, are often charmed by France’s endearing defects.
Indeed, the country’s economic quirks often serve to
advance its aesthetic appeal. Were it not for France’s
legacy of socialist leanings and curious economic policies,
for example, the country might not boast nearly as many
"artisanal" cheeses and pates and liqueurs. And if raw
economic priorities trumped every other consideration,
every charcuterie in France would have been converted long
ago into a Starbucks or McDonalds outlet.

But the French people, collectively, would never agree to
such sacrilege, nor to the sacrilege of working 40 hours
per weeks. 35 hours is ample, or so they have decided.
Inconveniently, economic policies that promote short work
weeks and low productivity do not always yield an abundance
of jobs. The French unemployment rate recently touched a 5-
year high of 10.2%.

We tourists might not be particularly sensitive to the
French unemployment rate, but currency investors are. It
matters not to us tourists whether the French economy
flourishes or falters, only that it continues to offer some
of the world’s finest culinary delights each time we visit.
Like patrons in a "gentlemen’s club" we tourists do not
care that the "dancer" can balance her checkbook, only that
she continues to dance.

But currency traders, in general, are not as aesthetically
minded. If they begin to sense, for example, that
underlying economic trends in Europe are beginning to favor
the dollar relative to the euro, they will respond
accordingly. They will sell euros to buy dollars…or
something else.

We are hesitant to proclaim a new dollar bull market, but
we have no trouble imaging a continuing euro bear market.
What intrigues us, therefore, is the possibility that the
euro’s prospective troubles might NOT produce a big rally
in the greenback. Rather, a growing dissatisfaction with
all paper currencies – euros as well as dollars – might
produce a big rally in gold.

We would not expect a big gold rally to begin immediately,
however. The initial reaction in the gold-trading pits will
be to sell gold against the rallying dollar. But we will be
curious to see how long that knee-jerk response might last.

It was not so long ago, you might recall, that investors
could not sell their dollars fast enough. Will such
impassioned dollar-sellers quickly become impassioned
dollar buyers? We doubt it. They might become hesitant
dollar-buyers for a while, but not impassioned buyers. The
dollar’s own shortcomings have not disappeared, even if
they have receded into the background temporarily.

The chart below illustrates quite clearly how gold has been
steadily climbing against the euro. We hold out the
possibility of a similar advance against the dollar, in
which case, an important new gold rally would have begun.

Because the French have voted "non," therefore, don’t be
surprised if gold investors soon begin panting,
"Oui!…Oui!…Oui!"

Even if a weak euro fails to ignite a gold rally, it might
spark a move in European resource stocks. Because Euro-zone
resource companies incur most of their costs in euros, but
generate most of their revenues in dollars, a weakening
euro improves their profit margins.

For most of the last three years, the euro resource
companies have been laboring under the strain of an
appreciating currency. For the last few months, however,
the euro has been slumping. Finally, therefore, European
resource stocks have begun to notice the trend change. Over
the last few weeks, the Bloomberg European Mining Index
(shown below) has been outpacing US-based resource shares.