GOLD PRICE NEWS - The gold price fell $4 to $1,103 this morning as the price of gold continued to drop following yesterday’s downside reversal. After its worst day in over a month, the spot gold price has now fallen for five consecutive trading sessions and is lower by $30 on the week. The price of gold has faced a bevy of headwinds over the past several days, including ongoing sovereign debt concerns in Europe, comments from China refuting speculation that it will add to its gold reserves, and a stronger U.S. dollar.

Since the sovereign debt issues in Greece and other “PIIGS” nations emerged in late 2009, the gold price has weakened as market participants have shunned the euro currency and flocked to the relative safety of the U.S. dollar. Mohammad El-Erian, co-chief investment officer at Pacific Investment Management Co. (PIMCO), which has $1 trillion in assets under management and runs the world’s largest mutual fund has been outspoken recently in respect to the far-reaching impact of sovereign debt issues. In a Financial Times op-ed titled “How to handle the sovereign debt explosion” El-Erian wrote that while markets are presently focused narrowly on Greece, it would serve everyone well to concentrate on the fact that these issues continue to escalate across the entire globe. El-Erian described this theme as the “the simultaneous and significant deterioration in the public finances of many advanced economies.”

The PIMCO co-CIO went on to discuss several points related to escalating sovereign debt issues, including the explosion in of US sovereign indebtedness to a “previously unthinkable” 20% of GDP in less than two years. As a result, El-Erian wrote that he expects to see “damaging recognition lags” in both the public and private sectors as governments and markets adjust to the consequences of such debt expansion. Moreover, he noted that history indicates that it is difficult for governments and companies to effectively deal with “the tyranny of backward-looking internal commitments.” Although he does not cite particular commitments, in the U.S. these would include the massive amount of unfunded liabilities tied to social security and Medicare, as well as unfunded private sector pension obligations.

In order to deal with the massive deficit and debt burdens faced by the developed world, governments have cheapened their currency. Declining purchasing power of money, the textbook definition of inflation, is the chief driver of the gold price. With fiscal austerity nowhere in sight, the uptrend in the gold price appears to be intact, notwithstanding daily and monthly price oscillations.

In conclusion El-Erian contended that the significance and consequences of escalating indebtedness around the world have yet to become fully appreciated and understood. Accordingly, these ongoing sovereign debt concerns are a large deflationary theme that will remain at the forefront of economic developments moving forward. While in the shorter-term investors have chosen the U.S. dollar as the safe haven currency of choice, based on El-Erian’s piece it appears this may be a shortsighted and dangerous plan of action.

Policymakers across the globe have focused on fighting the deflation risks that have emerged as a result of the credit crisis. The aggressive actions, both of a monetary and fiscal nature are not without consequences. The gold price has been one of the best performing assets over the past two years due to the torrent of liquidity that has been forced into the global marketplace. The price of gold and the shares of gold mining producers stand to have a tailwind as long as deflation remains the chief concern of central bankers.