The Gold market is currently firmly in the thrall of the European debt crisis, with investors runing to faithful Gold in the face of a avalanche of financial uncertainty.
Gold has has risen in price over $ 250 per troy ounce since its September 2011 low, almost exclusively on fears over Italy’s ability to repay it’s debt and other Euro related anxieties. This fear in the sovereign debt markets has crystallised into record Euro era borrowing costs of over 7% for Italy, even as statistics emerged showing the ECB had doubled its purchases of Italian debt in an effort to shore up confidence. Spanish borrowing costs are not far behind. Should such borrowing costs continue, Europe and the Euro looks set for a whole world or hurt.
The continuing crisis in the Eurozone brings to mind the final scene in “The Italian Job”. Michael Caine and his partners in crime are at one end of a bus, teetering over the edge an Alpine cliff, counterbalancing a pile of stolen Gold at the other. The weight of the Gold is dragging them over the edge. “Hang on a minute lads,” says Caine as the film ends “I got a great idea. Err…”.
Does any of this seem familiar? It should, because for all the discussion and pledges of action coming from european leaders, “Err…” seems to be sum of all the actual action so far. So in the contemporary Euro Italian Job remake we seem to be living through, the Gold and the people appear to have swapped places. It is the lack of sufficient Gold at the front of the Bus and the weight of the debt laden people (countries) at the back that are dragging it over the edge. The lack of ideas to remedy this situation rings all too true.
European efforts to get more weight in the front of the bus, in the form of “investment” from the Chinese, have proven unsuccessful. Greek, and to some extent Italian, political crisis are adding further instability to the equation. So the people (countries) in the back of the Bus are trying desparately to shed weight, with pledges of austerity measures. What makes “The Italian Job” analogy even more ironic is, that as aficionados of the 1969 British caper film will recall, the nationality of the Gold in the bus is actually Chinese. Funny how life mirrors fiction.
So far Gold has benefited well from this turmoil, where it has reverted to a true safe haven asset class. As it becomes clearer that Italy and now Spain are looking less and less able to meet their commitments, the yellow metal looks sure to breach $ 1800 per ounce.
The number of end game scenarios for this situation have been ever decreasing, as opportunities to head off the crisis have been missed. Currently we seem to be down to two. The Euro will break up, or there will be a huge burst of money printing to effectively write off the soveriegn debt by some means. Given the political and idealogical capital invested in the single currency the most likely outcome will be massive money printing.
The good news for Gold holders is that either outcome will be bullish for Gold. Fantastic demand for physical Gold Coins and Bars at the moment would indicate that those who have been paying attention are preparing.
By Erdenebayar from Pixabay