The gold price plunged $40 to $1,070 per ounce this morning as rising debt concerns across Europe punished investments tied to the price of gold - including gold mining companies, gold stocks, and gold ETFs. The gold price came under severe liquidation pressure as escalating sovereign debt issues in several nations throughout Europe - including Greece, Portugal, and Spain - fueled a U.S. dollar rally and weakness in the price of gold. At a gold price of $1,070 per ounce, the price of gold has approached its lowest level since early November as market participants have continued to move to the safety of the U.S. dollar relative to other fiat currencies. The euro-dollar currency cross retreated to 1.378 - its lowest level since June 2009 - as the U.S. dollar carry trade continued to unwind amid the sovereign debt issues in Europe. The price of gold has displayed a relatively high correlation to the euro currency over the past several years, as each acts an anti-dollar investment vehicle.

The main factor behind the stronger dollar and weaker gold price were increasing worries that mounting budget deficits in Greece, Portugal, and Spain would provide further challenges for these European governments. While the European Union’s pledge yesterday to support Greece’s plan to reduce its deficit - the largest in the region - temporarily calmed financial markets, selling pressure returned in earnest today across European markets.

Although the European Union has lent support, developments within Greece suggested Prime Minister George Papandreou may not garner enough domestic support for spending reductions. Moreover, Greece’s largest union, GSEE, approved its second mass strike this month to protest the spending reductions, further contributing to the over 3% drop in Greece’s ASE Index. Meanwhile, anxiety in Portugal over its own deficit problems forced credit-default swaps on Portuguese government debt to a record high and Portugal’s PSI-20 Index - the nation’s main equity index - fell over 4%. Equity markets in Spain did not fare much better, as Spain’s IBEX Index declined over 3% - its lowest level since August 2009.

Looking ahead it appears that further sovereign debt issues throughout Europe will continue to weigh on the euro currency as investors move to the relative safety of the U.S. dollar. Although the dollar has many of its own problems, one large advantage it has over the euro is a unified government - as opposed to a collection of independent countries with different financial and economic issues to face. As a result of its recent strong correlation to the euro, the gold price may come under additional pressure if the deficit and sovereign debt issues in Europe escalate. However, as has been proven during the financial crisis, the primary policy response of the Federal Reserve and European Central Bank (ECB) has been easy monetary policies that include near-zero interest rates and quantitative easing measures. These policy measures have served to further debase the corresponding fiat currencies, and if the past decade is any indication, over the longer-term the price of gold has benefitted considerably from such developments.