Gold Price Dives Below $1,800

GOLD PRICE NEWS – The gold price plunged below $1,800 per ounce Thursday morning with profit-taking in the gold futures market fueling the sell-off.  Gold prices stabilized near $1,790 after the European Central Bank announced “dollar liquidity” measures in cooperation with the U.S. Federal Reserve.  With Greece on the verge of default, central banks are furiously attempting to inject confidence into the international monetary system.

On Wednesday, the gold price fell $11.89 to $1,821.81 per ounce amid a rebound in global equity markets and pledges from European policymakers to continue supporting Greece through its sovereign debt woes.  The spot price of gold oscillated between $1,815 and $1,835 for most of the day, before closing with a modest loss.  Given the recent increase in gold price volatility, yesterday represented a relatively quiet day for the yellow metal.

Silver posted a more substantial loss than the price of gold on Wednesday, as it dropped $0.65, or 1.6%, to $40.45 per ounce.  Precious metals equities slid alongside the price of gold and silver, with the Philadelphia Gold & Silver Index (XAU) retreating 1.6% to 214.80.  Barrick Gold (ABX) and Goldcorp (GG), the world’s two largest gold companies, sunk 1.8% and 2.4%, respectively.  Among silver producers, Hecla Mining (HL) slid 1.5% and Silver Standard Resources (SSRI) tumbled 3.2%.  Gold mining stocks moved lower early Thursday on the back of weaker gold prices.

Equity markets across Europe and the U.S. moved considerably higher yesterday as German Chancellor Anglea Merkel and French President Nicolaus Sarkozy reaffirmed their commitment to Greece following a call with Greek Prime Minister George Papandreou.  In a joint statement, Merkel and Sarkozy asserted they are “convinced” that Greece will remain in the euro zone and that Greek budget cuts will restore stability to the nation’s economy.

The gold price turned modestly lower and the Dow Jones Industrial Average (DJIA) and euro currency extended their gains following release of the statement.  The Dow finished higher by 140.88 points, or 1.3%, at 11,246.73.  The euro climbed from near 1.36 to as high as 1.3782 against the U.S. dollar.  Risk aversion subsided as well, with the CBOE Volatility Index (VIX) falling 6.3% to 34.60.

Although the gold price declined and the broader markets cheered the Greek news on Wednesday, European policymakers did not make announce any specific, concrete plans for dealing with the crisis.  Yesterday’s rally was likely fueled in part by excessively bearish sentiment on the broader markets, which from a contrarian perspective is a bullish factor.  The latest weekly Investor’s Intelligence numbers showed the percentage of bearish investors outweighed bulls – at 40.9% versus 35.5% – for the first time since March 2009.

While equity markets may therefore have more room to run in the short-term, the facts remain that with Greek one-year yields over 140% and ten-year yields near 25%, the credit markets are saying that it is a near certainty that Greece will default.

Kyle Bass, founder of hedge fund Hayman Capital, elaborated on this dire outcome in an interview with CNBC yesterday.  Bass – who correctly has been bullish on the gold price and bearish on the euro zone for the past several years – argued that a Greek default is inevitable due largely to the fact that the nation’s significant debt burdens dwarf its ability to generate economic growth.  “Greece has to default,” Bass contended.  “It’s going to be a hard default, and then it’s going to be difficult to contain the contagion.”

Although Bass did not directly discuss other European nations facing debt challenges – such as Italy, Portugal, or Spain – the contagion he alluded to may mean a default for other members of the PIIGS.  Moreover, Bass noted that there is no enforcement mechanism currently in place by which Germany and France can ensure that the PIIGS properly implement austerity measures and meet economic growth targets.

As for the gold price, while Bass did not focus on it specifically, the dire economic outcome he forecasted is likely to be beneficial for the yellow metal over the longer term.  “The world is going to be a more destabilized place a year from now,” he contended.

During past periods of significant financial instability, policymakers across Europe and the U.S. have shown that their response is to drive interest rates lower and print money to try to stimulate their economies.