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The Bullion Report

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October 12, 2011 in 'The Bullion Report'

More on Metals and the Euro ZoneMore on Metals and the Euro Zone


The European Union is having a tough go of things this year. Debt issues in several areas have weighed heavily on any potential recovery. The world looks on, and questions bailouts and potential bankruptcy. Amid all of this uncertainty, there seems to be plenty of room for alternatives like gold and silver to find their way into investors’ portfolios. Let's take a look at how gold demand is shaping up across the pond.

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

A few months ago when the initial Greek struggle was in full swing, I analyzed the potential effect on euro zone demand for precious metals. Despite several attempts to prop up the economy of the Mediterranean nation, it doesn't appear that there has been a significant change in the area’s fundamentals. In fact, things look like they are continuing to deteriorate. Around the time of my first dismal outlook on the area, Fitch Ratings had lowered the credit rating for Greece. Since then, the credit ratings and outlook for other members of the euro zone have dimmed as well.

The trouble seems centered on Greece, but Italy, Portugal, Spain, and Ireland have all had black marks on their records as well. Banks and policy makers have been able to shift and shuffle so far to preserve the perception of action, but how long can they go on? One of the biggest problems that has yet to be fully addressed at home as well as abroad is the bigger picture of economic support and eventual recovery. There were misty promises of things being back on the positive side, but so far the proof has not been in the pudding. The ripple effect from the troubling levels of unemployment, poor growth, and inflation have set in and eroded any of the initial gains from each round of stimulus. Unfortunately, the lower interest rates held by some central banks have limited the potential action that policy makers can take to prop up spending and business activity. It also gives them a rock and hard place to deal with whenever things are under threat from price inflation. Raise rates too soon and any feeble threads of recovery or growth collapse. Leave them too long and consumers and businesses struggle under the burden of the additional costs.

The latest inflation data out of the Euro zone showed that consumer price inflation spiked. Prices came in with a surprise 3.0 percent jump last month which marks the highest level since 2008. This was higher than forecasts, and led many analysts to sour on the prospects for a European Central Bank rate cut any time soon. In fact, last week's central bank meeting saw the ECB leave its benchmark rate unchanged at 1.5 percent. No matter how much the Euro zone economy has faltered in recent months, they are almost in a position of having their hands tied.

The ECB is also doing battle with another tangled situation. That is their direct hand in bailing out Greece. At this point, so much of their balance sheet is tied up in Greece not collapsing completely that more energy is directed towards salvaging the area rather than stimulating it.

What does all of this hold for metals?

The truth is that nothing has really changed from my former assessment on the area. There are twin pillars of support that I still see lending good motivation for gold and silver buyers. One is the weakness that the euro currency shows with each bad news headline. The other is the drive for gold (and to some extent, silver) as inflation hedges while prices threaten to rise. The most recent gold demand trends digest from the World Gold Council notes that, "During the second quarter of this year, [ETF] demand was concentrated in Europe, again related to fears over European stability." Many of the new price records in gold were set following the initial wave of fear over potential debt contagion. It is not unreasonable to imagine that demand for precious metals would go well beyond ETFs and similar products.

 

Summary

The final quarter of this year will likely continue to offer fresh news and chances to digest the changes in Europe. Other countries are probably following the example set by France, where investors switched to net buying of gold and other precious metals as debt fears spread. There is little to suggest that the fragile western economies are going to be healed any time soon. That kind of uncertainty and continuing unrest underpins every move higher in metals prices. The elevated demand noted in the Euro zone is unlikely to abate until complete recovery is assured. No false starts, no smoke-and-mirrors. Real growth and recovery of the weaker economic areas will determine the direction of demand and until then investors will seek out havens in which to park their assets. As I have said before, this normally comes down to gold and silver. And after a recovery? Who knows - there is ample reason to suspect that the fallout has changed investor attitudes, added fresh shine to precious metals, and redefined how portfolios are diversified. 

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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.