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08/25/2010

The Bullion Report

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May 25, 2011 in 'The Bullion Report'

Gold & the Euro ZoneGold & the Euro Zone

From the average investor’s perspective precious metals are likely quoted in US dollars but their influences are global. This week a lot of focus is falling to the Euro zone and potential debt issues with member nations (despite attempts to bury it beneath headlines of sex scandals). What kind of relationship does that region have with gold? How could debt crises there spin into potential opportunities for precious metals?

 

gold chart 5-25-11

Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Traditionally, the relationship precious metals have with members of the European Union (EU) is not unlike the one seen in other developed nations. There remains a strong pull to add gold and silver to central bank reserves despite the fact that there is no currency linked to the metals. The majority of mining happens outside of the member countries so there is no real link to be seen there. The relationship at the moment relates more to the financial well-being of the area as a whole rather than any intrinsic link to one major player in the euro zone.

Basically, the area is tied together in a way that makes the whole system very fragile. There are countries that are strong participants in the overall economy of the unified area and others that are threatening the foundation. Right now, Germany appears to be a leader on the strong side while Greece is among the weaker links.

Greece led headlines this week when its credit rating was lowered by Fitch Ratings. This comes after months of a financial struggle that has seen Greece get bailouts from the EU and the International Monetary Fund (IMF). The Mediterranean country was not the only one getting support in dire financial times. Ireland and Portugal have also seen cracks in their fiscal façade, and they are widely believed to be next in line for ratings review by Moody’s. Ratcheting down the ratings of two more member countries could spell disaster for the EU markets but good news for bullion bulls. In addition, there are signs of weakness from Spain, Italy, and Belgium as well. That represents six countries from an area that is seventeen members strong - not a happy ratio. This has apparently added to investor concerns and shifted some focus for the last year. What do I mean? Well, the fact is that member states with stronger economic hopes have shifted some investments to gold or silver.

In the World Gold Council report on ETF tonnage there was a significant shift into investment demand for gold following the European Central Bank’s 750 billion euro rescue package. This demand was coming from countries like Germany and Switzerland. This heralded a notion that people within those countries were putting their risk capital into perceived havens or less volatile asset preservation vehicles as the future in the area became a little more clouded. Last spring there was also a strong push to acquire physical gold which led to sales from the Austrian mint being labeled as “panic buying.” Bloomberg reported on sales from the Perth Mint to Europe jumping at the start of last summer.(1) In the fall, there was a marked halt in the sales of gold from member’s central banks. Most of those members are signatories on the Central Bank Gold Agreement and as such are already limited in their potential gold sales. However, their sales were still lower as financial uncertainty ate into the forecasts.


Summary

In a pattern similar to debasement of the US dollar, it seems likely that the Euro currency will not be able to sustain any investor interest as long as member nations are falling to financial pieces. That means a stronger potential pull into assets like gold and silver (and platinum and palladium to a lesser extent) while investors hope to secure or preserve wealth while things fall apart around them. There seemed a time where the bailout packages were going to help places like Greece, Ireland, and Portugal, but now it feels like they are just the proverbial elephants in the EU room that will continue to stomp on any advances the unified currency might make. Overall weakness in currencies continues to offer potential support to bullion despite the recent weakness seen in both gold and silver. This means that the latest dips down were probably taken as excellent buying opportunities even as both metals sit near record high prices.

1. http://www.businessweek.com/news/2010-06-03/gold-sales-to-europe-jump-on-crisis-perth-mint-says-update1-.html

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.