Gold Price Stabilizes, ECB to Print Money?

GOLD PRICE NEWS – The gold price stabilized Thursday morning near $1,770 per ounce following considerable weakness yesterday.  The spot price of gold fell to $1,753.00 in overnight trading, but rebounded as the U.S. dollar turned lower against a basket of the world’s leading currencies.  Euro zone debt concerns remained at the forefront of financial news this morning, although equity markets across Europe bounced back from several days of losses.  U.S. equity markets looked to open higher as well, with S&P futures up 1.3% at 1,241.75.

On Wednesday the gold price succumbed to widespread liquidation in financial markets, as it dropped $22.28, or 1.2%, to $1,776.92 per ounce.  The price of gold was one of many asset classes to move sharply lower as sovereign debt concerns across Europe continued to escalate.  Strength in the U.S. dollar also helped to pressure the gold price, as the U.S. Dollar Index advanced 1.6%.  The euro currency fell to 1.3540 against the dollar – its lowest level since early October.

Gold shares tumbled alongside the gold price, with the AMEX Gold Bugs Index (HUI) sinking 3.1% to 586.12.  Two of the worst performing components of the HUI on Wednesday were Harmony Gold (HMY) and Kinross Gold (KGC), which each retreated 3.9%.  The broader U.S. equity markets posted steep losses as well, with the S&P 500 Index tumbling 3.7% to 1,229.10.  Risk aversion surged higher in the process, evidenced by a 31.6% climb in the CBOE Volatility Index (VIX) to 36.16.

In recent days the eye of the sovereign debt storm has shifted from Greece to Italy, as the Italian ten-year bond yield surged above the critical 7% level.  Eric Chaney – Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry – stated in a Bloomberg interview that “The market is testing the commitment of the euro zone’s stewards.  Italy is the real crisis battleground.”

The turmoil was later exacerbated by German Finance Minister Wolfgang Schaeuble, who told policymakers that Italy should seek financial assistance from the European Financial Stability Facility (EFSF).  However, the remaining funds available under the EFSF pale in comparison to the amount of assistance Italy is likely to require, according to Bloomberg.  As a result, speculation has risen that the European Central Bank (ECB) may be forced to implement a money printing program to stave off the contagion.

Dr. Martin Murenbeeld, chief economist at Dundee Wealth Economics, discussed the implications of the debt crisis for the price of gold in a recent note to clients.  “For gold, the end game should be clear,” he wrote.  “Sooner or later the ECB will have to ‘print’ more liquidity – buy more government paper.  I believe that the ECB should print sooner rather than later, before the crisis in Greece leads to an abrupt, unscheduled, rogue withdrawal of Greece from the Eurozone, with massive defaults to follow.”

“The technical picture remains very constructive for gold,” Murenbeeld added. “Bullion is back above its 50-day moving average, and it hasn’t threatened its 200-day moving average since mid-2010.  Once the ECB is forced to leverage its balance sheet gold should rise to new highs, but there could be much volatility before then.”

Murenbeeld, who has been bullish on the gold price for many years, did caution that “This crisis can end badly for gold, at least for a period of time, if the OECD plunges into recession on the back of a depression in Europe, and China has a hard landing.”

However, he contended that “Inevitably…such developments will beget massive policy reflation, including more central bank ‘printing’, currency devaluation, and protectionism. We expect gold to then rise well over $2450 – which is what the peak of $850 in 1980 works out to when adjusted for inflation.”