Gold On The Comeback Amid European Turmoil

Readers may recall that for weeks and months as Europe’s economy and financial system entered the crisis stage, the price of gold suffered. The reasons for this were quite understandable, yet were completely lost on the financial media.

When the price of gold was falling in the face of the bad news coming out of Europe, members of the media and pundits alike were actually declaring that gold had lost its safe haven status. This preposterous view was exactly and perfectly wrong. The fact is, gold was performing as the safe haven it purports to be.

How?

By providing a source of ready liquidity. As their positions in other investments were tumbling, investors were able to turn to gold as a source of cash to cover their positions. Once that initial activity was complete, the price of gold began to rise in response to the European crisis, as we are seeing this very day.

Incidentally–and importantly–this is very similar to what occurred with gold back in 2008 when the US financial system very nearly melted down; gold initially fell, but ended up rising strongly for the year in 2008, while stocks were tumbling.

Note that we may see some of this activity near-term because there is a very important election in Greece on Sunday, June 17th, which will have a profound impact on the future of the euro and the European financial system. Brokerage houses and trading firms are issuing warnings to clients to be ready to add funds to their accounts to avoid possible liquidations in the face of expected volatility:

http://www.zerohedge.com/news/here-comes-herd-highly-volatile-trading-conditions-expected-ahead

Given gold’s history as a ready source of liquidity, there is no more appropriate asset for investors to tap into to preserve their capital, though this could mean a temporary decline in the price of gold.

But make no mistake: the outlook for gold remains positive and the financial world, who has no particular reason to be positive on gold other than to be on the right side of the market, is increasingly waking up to this reality.

JP Morgan Chase, who no doubt could use a ready source of liquidity on hand at all times given their recent trading track record, has issued its opinion that the outlook for gold “remains favorable,”:

http://www.etfstrategy.co.uk/gold-etfs-gold-outlook-remains-favourable-says-jp-morgan-as-bargain-hunters-step-in-list-of-gold-etcs-22479/

Commerzbank, the second largest German bank, stated this week that it expects the price of gold to rise substantially between now and the end of 2012, revisiting its prior highs of $1900 per ounce, which would mean an increase of more than 17% from current levels:

http://www.cnbc.com/id/47793283

All of this, of course, comes against the backdrop of the still evolving economic and financial crisis in Europe. Observers can scarcely remember a crisis that has taken so long to metastasize. Germany has been the engine that has kept the European Union and the euro chugging along. Now Germany appears to be hitting the panic button, sounding the alarm about the deteriorating situation in Greece, Spain and Italy:

http://ca.news.yahoo.com/dont-overestimate-germany-euro-crisis-fighter-merkel-100257522.html

Investors are indeed turning to gold as the Greek election approaches and world policymakers contemplate measures that, while designed to boost economic activity, actually will serve to undermine man-made paper currencies, like the euro and the dollar. Gold is the ultimate form of real money:

http://www.marketwatch.com/story/gold-extends-gains-in-electronic-trading-2012-06-15?dist=beforebell

 

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