Montreal, Canada

Despite some heavy selling across risk-based assets over the past week, gold prices have failed to provide an anchor to diversified portfolios amid the carnage. Indeed, gold has struggled to stay above $1,400 an ounce this week.

Gold won’t make any serious headway until the Japanese yen and the European single currency turn lower. Traders and investors are scrambling to both currencies this month while discharging gold; measured in both yen and EUR terms, gold prices are declining since earlier this month.

In the yen’s case, the Japanese earthquake/tsunami has resulted in a sudden rush to bring yen home to finance reconstruction; in addition, Japan’s fiscal new year ends on March 31 so that add another rush to raise yen. That’s not good for gold, at least over the short-term.

In the EUR’s case, the market is beginning to digest an interest rate hike by the ECB next month – however stupid and ill-timed. About 20% of eurozone GDP is compromised by the ongoing destruction of credit in the periphery while Portugal is about to join Greece and Ireland at the bar. Yield spreads in Lisbon point to an imminent bailout. But these countries, mired in deep deflation, cannot handle a rate hike at this time.

Still, the ECB is concerned about surging commodities prices and rising wage pressures growing in Germany. A rate hike or expectations of one is therefore deemed bearish for gold.

Regardless of these short-term fluctuations, another buying opportunity for gold and the gold stocks lies ahead this spring or summer.

The Bank of Japan at this point can’t buy inflation after struggling with falling prices for 20 years while the ECB is cornered, trying to appease the mighty Germans at the worst absolute moment amid debt deflation in the periphery.

The battle against deflation continues as Japan spends its way into oblivion to boost the economy. Other central banks might be tightening but none of them have the guts to aggressively raise rates at this time.