Gold Price Advances as Europe Mulls Options

GOLD PRICE NEWS – The gold price climbed higher Monday, rising back above the $1,650 per ounce level.  Despite the fact that European leaders decided at this past weekend’s summit in Belgium not to use the European Central Bank’s balance sheet more aggressively to combat the sovereign debt crisis, investors bid up the price of gold anyways.  Gold prices have been mired in a correction as debate rages over whether the current deflation scare is in the process of sending the global economy into a new recession.

On Friday the gold price climbed $18.80, or 1.2%, to $1,639.60 per ounce amid U.S. dollar weakness and a broad-based rally on Wall Street.  The SPDR Gold Trust (GLD), the world’s largest gold ETF, rose $1.75, or 1.1%, to $159.52 per share.  Despite Friday’s advance, the spot price of gold posted a weekly loss of 2.5%.  Silver jumped $0.67, or 2.2%, to $31.27 per ounce on Friday alongside the gold price.  However, it too finished lower for the week, by 2.9%.

As for precious metals equities, the Philadelphia Gold & Silver Index (XAU) rose 1.8% on Friday but posted a weekly loss of 6.5%.  Over the past five days, Barrick Gold (ABX) and Goldcorp (GG) – the sector’s two largest companies – slid 7.6% and 7.8%, respectively.  Gold mining stocks moved higher early Monday.

The gold price was pressured last week by widespread weakness in commodities as uncertainty over the European sovereign debt crisis cast a pall over financial markets.  Euro zone finance ministers began a six-day meeting on Friday in the hopes of developing a more robust plan to combat the escalating crisis.  Leveraging up the European Financial Stability Fund (EFSF) to as high as €2 trillion has been a topic of considerable debate, but no concrete plan has yet to be agreed upon.

While speculation of a leveraged EFSF helped to boost equity markets across the globe last week, such a measure faces numerous legal hurdles in many European nations.  Moreover, many market pundits and investors have argued that a leveraged EFSF simply will not gain approval because several factions of the German government remain vehemently opposed to it.

Dennis Gartman, publisher of the widely-followed The Gartman Letter, included commentary on the euro crisis in a recent letter from Mark Grant of Southwest Securities.  Gartman described Grant as having “the singularly best insights and thoughts as an American on what is going on and how the situation shall play its way out.”

Grant wrote that “France is screaming at Germany that if they are downgraded it will damage the EU construct as the only major ‘AAA’ country left supporting the euro zone will be Germany and that the ECB and other European institutions will be downgraded.  Merkel cannot get her parliament to agree to recapitalize the banks of France nor can she get her parliament to agree to lever up the EFSF because of the potential cost to Germany.”

“Finland has made it clear that any leverage of the stabilization fund would have to go back to their parliament for approval,” Grant added. “Germany/France are getting the same message from Austria and the Netherlands et al. Everyone knows this would take 4-6 months. Finland does not believe they could get the leverage to pass their parliament if it went back for approval.”

Grant concluded by saying that “Europe has now run out of road. There is no compromise that is politically acceptable. Whatever choices are left are ones that are either politically or economically painful and perhaps impossible. Whatever gets done is going to be nowhere near what some in the marketplace have hoped for or bet on.  Europe has reached the wall.”

The implications of Grant’s predictions for the gold price are quite unclear, particularly in the short term.  In the absence of a leveraged EFSF, Greece is almost certain to default, and several other PIIGS may not be far behind.  Such a scenario would likely lead to substantial and widespread liquidation in financial markets – where investors are forced to sell any and all asset classes to raise cash – which could present a significant headwind for the gold price.

However, further turmoil in Europe could also have grave consequences for the euro currency and thus add to the wave of declining confidence in fiat currencies across the globe.  Furthermore, the risk of deflation in many developed and emerging economies would likely increase in this scenario, thereby provoking central banks to implement a slew of additional accommodative monetary policies in efforts to resuscitate their respective economies.  In such an environment, the gold price would likely be a prime beneficiary.