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European Crisis Creates Gold Bulls

Gold's Unsteady Future

Written by Brian Hicks
Posted July 8, 2013

Bullish sentiment over gold appears to be growing in Europe. Expectations of a rise in the price of gold comes hard on the heels of Portugal’s increasing political instability as well as cratering prices across the Eurozone.

GOLD OUTLOOKHere in the U.S., gold has not been doing well at all. Much of that is thanks to the Federal Reserve’s rumored movement toward ending the stimulus program. Back in April, of course, demand was skyrocketing for gold jewelry and coins across the world since prices were so low. Turkey, for example, saw its imports rise to a 4.5-year-high. That country is the world’s fourth-largest consumer of gold.

Last week, though, two Portuguese ministers resigned, meaning Portugal’s borrowing costs increased to their highest in two months.

Bloomberg reports:

“A recovery will be tentative initially but a return of the euro zone debt crisis could spark a more sustainable rally,” said Mark O’Byrne, the executive director of Dublin-based GoldCore Ltd., a brokerage that sells and stores bullion coins and bars. “Many jewelers internationally are likely to use the recent price falls as an opportunity to stock up.”

London gold prices dropped to $1,213.48/oz in 2013 as of the end of June, while the Standard & Poor’s GSCI gauge, which measures 24 commodities, sank 2.5 percent since January started. The MSCI All-Country World Index, which measures equities, was up 5.1 percent, but U.S. Treasuries were down 2.5 percent.

The resignations in Portugal led to the nation’s 10-year bonds going over 8 percent. Worries mounted as to whether Portugal would be able to handle an EU-led bailout. With specters of an even worse debt crisis in the face of accelerated central bank stimulus action rising, gold shot over $1,921.15 back in September 2011. That seems rather far away today.

Oil seems to be a factor too. The recent political upheavals in Egypt forced crude over $100/barrel last week, which contributed toward increasing gold’s attraction as a hedge against inflation due to rising oil prices.

Turkey’s healthy gold influx and strengthening Chinese demand also helped gold make a comeback of sorts. India, too, saw premiums on gold rise due to central government restrictions on imports.

The U.S. Mint, however, saw sales of American Eagles decrease by 19 percent (ounces) in June compared to May. Australia, likewise, saw declines in the sales of coins and bars—by as much as 47 percent.

ECB Reaffirms Commitment to Low Rates

Meanwhile, the European Central Bank’s renewed action with regards to stimulus has not gone unnoticed by the markets. Last Thursday, the ECB decided to keep to a flexible monetary policy for the foreseeable future, though the Bank of England noted that bond yields are rising in an uncontrolled fashion. CNBC notes that these bits of news spurred an EU-wide stocks rally even as the sterling and the euro weakened.

In sum, the ECB kept its main interest rates steady but made clear that current rates would remain where they are or even go lower. That’s what caused the euro to drop to a five-week low versus the U.S. dollar. The British pound fell 1.2 percent. This is where things get interesting.

Over here in the U.S., the Fed’s movement toward ending its asset-buying program failed to bring back gold as a safe-hedge bet. But over in Europe, the euro and the pound both depreciated versus the dollar. The problem is that that euro is likely to keep declining for a bit, which means the dollar would be stronger over there, and thus gold would continue being weak at least in the medium-term. This detailed analysis over on GoldSeek provides some mathematical context.

But over on CNBC, former banker Satyajit Das issues a strong warning to Europe’s central banks, pointing out disturbing parallels between the situation there and Japan’s history of pursuing low-interest-rate policies, which ended in persistent stagflation. Remember, Japan still has one of the biggest debt piles worldwide—more than 200 percent of GDP as of 2012—and this was largely developed on purpose by following policies of low interest rates and currency strength.

CNBC quotes Das:

"All the things we criticize Japan for, in terms of poor decision-making and lack of structural reform, is exactly the same in Europe. So give me a reason why Europe is going to be any different? Central banks are trapped between policy measures which have limited success on the one hand, and the risk of financial collapse if they withdraw measures.”

Will Das be proven right? The past year saw the FTSEurofirst 300 rise 7.2 percent, and now the ECB has reaffirmed its commitment to keeping rates current or lower. We’re going to have to ride through interesting waters in the near future.

 

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