By Matthew Walls
The skepticism that’s greeted the European Union’s £750 billion ‘shock and awe’ rescue package has driven gold to a new record high above $1,240 a troy ounce, much as many predicted at the start of the year.
That the gold price has soared for different reasons than predicted is a sign that, in the uncertain times of today, gold is nearly a fail-safe asset. Unlike some industry watchers forecast, inflation hasn’t arrived. China hasn’t significantly reduced its purchases of U.S. Treasuries. Ratings agencies haven’t downgraded U.S. debt. Asian central banks haven’t made big bets on gold, at least publicly.
Instead, the euro is struggling under the strains of a sovereign debt crisis few imagined would reach today’s proportions, and investors are flocking to gold for its stability. The trend’s noticeable in Europe, and particularly Germany, the country on the hook to fund the biggest chunk of the E.U. bailout.
Gold coin and bar demand in Europe is as high as it was in 2008 during the start of the financial crisis. The joint E.U. and IMF rescue package did quash speculation of a breakup of the monetary union and government defaults. But it hasn’t dispelled doubts that member-states lack the political will to enact austerity measures, or will grow their way out of debt.
Gold in euros is making record highs as a result, as has gold in sterling, since investors fear the U.K.’s hung parliament will prevent the government from grappling with the country’s heavy debts. Gold in dollars has been an impressive, though not outstanding performer. Gold and the dollar are both safe havens at times of crisis, and the dollar’s strength has slowed gold’s advance. The yellow metal has gained 9% since mid-April, compared to the 17% gain in gold in euros and 12% in gold in sterling.
Analysts expect the uncertain road ahead for the European Union could keep the euro volatile and keep gold, in euro-terms, outperforming gold in dollar-terms in the near-term. But gold in dollars is less vulnerable to the sharp correction that gold in euros may experience if the E.U.’s rescue efforts manage to calm markets in coming weeks.
Meanwhile, gold in dollars could benefit even if the euro recovers, since the worries of inflation and currency devaluation will reassert themselves — especially if the European Central Bank resorts to buying debt owned by Greece and other southern E.U. states as a way out of the impasse.
“In a sense, gold can’t lose,” said Philip Klapwijk, a precious metal analyst at U.K.-based consultancy GFMS.
Klapwijk expects gold will rally to $1,250/oz, but he rules out a rise to the $1,300/oz mark for the first half of the year, as he thinks scrap selling will surge and jewelry demand collapse near that price.
But neither of those two factors would stop a gold rally if the E.U. can’t get to grips with the debt crisis, he added. “If we were to see the crisis spread to Spain, Portugal and the U.K. — now with a hung parliament — we may see sufficient investment funds come into the market to drive gold to the $1,300 level.”
Right now, the chances of that kind of ‘fat tail’ or extreme event occurring are higher, making gold a low risk, blue sky asset.
“The tail risk is getting bigger every day,” said JP Morgan analyst Michael Jansen, who expects gold in euro- and sterling-terms to perform well. “Gold is reflective of that tail risk. I can’t see that stopping.”
Investors and speculators worried about sovereign debt levels may force governments to live within their means faster than they like, leading to higher taxes, austerity measures and slower growth, Jansen said.
If governments are forced into that uncomfortable territory — witness the violent protests in Greece — financial markets may relapse into a liquidity crunch many thought we’d escaped.
dollar, ECB, EU bailout, gold price, Greece, sterling
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