This past week the spot price popped another $20 as more investors sought the relief of buying gold as the European problem intensifies and shows signs of maturing in the near future.
Posted by Adam King on January 23, 2012
Buying Gold to Hedge the European Problem
January 23, 2012 – This past week the spot price popped another $20 as more investors sought the relief of buying gold as the European problem intensifies and shows signs of maturing in the near future. The head of sovereign ratings at S&P stated he believes Greece will default shortly and the European Central Bank is preparing for a massive trillion Euro quantitative easing program to begin next month. Even the rumor of further disruption and the announcement of fiscal stimulus in Europe are propelling the price of gold even higher, so as these events in Europe actually occur the price of gold will skyrocket.
The possibility of a further bailout from another European nation to bolster Greece’s economy is fairly extinguished. A very unpopular bailout package funded by Germany, the most financially sound of the European Union countries, failed to balance the budget in Greece. China and Brazil, when European leaders came knocking with their hats in hand, both told Europe to take care of its own problems, refusing any monetary stimulus.
For a long time, analysts and economists have been predicting a quantitative easing or inflationary program in Europe, but this has been universally denied and repudiated by European leaders. It now looks to be on the schedule for next month and to entail the injection of a trillion Euros into the ailing banking system. This mirrors many of the measures taken in the American financial system as quantitative easing followed major bailout projects that essentially failed.
Despite this planned intervention in Europe, the World Bank has cut its economic outlook by the most in three years and has said Europe entered a recession in the fourth quarter of last year. Further, the World Bank urged developing economies to “prepare for the worst” as it sees the possibility of the European problem enveloping the globe in a financial crisis on the order of 2008.
Buying gold is the only bright spot in the doom and gloom. It is not particularly fun reporting on the dire news coming out of Europe, but it is important to understand the gravity of events as they happen. We all would have liked to have been more prepared for the crisis of 2008 and hopefully we learned a few lessons from it. A quantitative easing program in Europe could artificially suppress the price of gold in nominal amounts temporarily as the Euro gains and brings the dollar with it, but it would be very short- lived. The price of gold would rise following any quantitative easing in Europe.
The kind of market that is being described is one in which you want to own gold at any dollar price you can get it. With each successive round of disruption coming out of Europe, the price of gold will rise and its true value on the market will become more clear. If the market rebounds, commodities will rise, gold leading the pack. If the economy suffers, gold will rise as a real currency and safe haven asset. Being ahead of the curve and buying gold now is the best strategy for hedging this market.
Stewart Lawson
Senior Staff Writer – Certified Gold Exchange
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US Gold Market
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