Is Gold Set to Push Higher?

Gold bulls are predicting the yellow metal will break $2,000/oz by the end of this year, yet gold’s much-vaunted status as a safe haven has not been in evidence during recent market turmoil. You would have thought the threat of a global banking meltdown if Italy fails would be enough to promote a flight to safety by buying gold. After all, the bond markets have reacted to worries in Europe by not just pushing up Italian premiums to unsustainable levels over 7 percent, but also French and even German bonds have risen.

Yet gold has done little more than rise 4 percent this month, with the only visible support coming from Asian buyers stepping in on the dips. Buyers have come from both the Asian investment community and from the physical market, particularly Indian buyers ahead of the upcoming wedding season. Support is evident at $1,750 according to Standard Bank, placing something of a floor under the metal in spite of limited appetite to push prices higher.

Although gold has risen by nearly a third this year, a Reuters article rightly identifies the driving force as rising liquidity as the developed world’s central banks, including the US Fed, Bank of England, the ECB, Bank of Japan and Swiss National Bank, have sought to lower interest rates and/or exchange rates.

Rather than safe haven, the most likely primer for a push higher will be if the ECB has to print money to support bond purchases of Italian and Greek debt. Germany’s unwillingness to fund a bailout for Greece, let alone Italy, a reluctance extended to blocking the ECB from turning on the printing presses, is probably all that’s keeping the euro firm. Any sign of a relaxation in their position will be taken as a positive sign for gold.

Of course, the Germans are well aware of the perils of funding a bailout, pumping money, or allowing the ECB to pump money, into the European economy by buying up bonds, which will weaken the euro and lay the foundations for inflation in the medium term. Interest rates will have to stay low to fund the mountains of debt and yet rising inflation will mean we have, in practice, negative interest rates a recipe for gold price increases.

Inflation is already uncomfortably high in the UK, but the UK is outside the single currency; only German fiscal discipline (some would say stubbornness) has kept it under control in Europe, but the Bundesbank may, against all previous assertions, decide they have no choice other than to allow the ECB to print money and step in as a lender of last resort. A Greek default or exit from the euro would be problematic but containable — the same for Italy would not. French banks alone are said to be holding over 300 billion euro of Italian debt. For Italy to default or leave the euro would leave French banks with unsustainable losses hence Nicholas Sarkozy’s desperate attempts to coerce the Germans into some form of bailout.

The next week or two could be crucial. We are not by nature gold bulls at MetalMiner, but even we would admit the European debt crisis has just about the only conditions capable of giving gold a sustained push higher.

–Stuart Burns

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