Morning Gold & Silver Market Report – 11/16/2011
WILL GOLD BE THE ONLY WINNER IN THE EUROZONE CRISIS?
In an article today by Matthew Lynn for MarketWatch, Lynn presents a compelling case that gold may turn out to be the only winner in the eurozone crisis. In a scenario where sovereign bonds have been hammered, equities are neutral year-to-date with high volatility, eurozone banks are taking huge haircuts on Greek debt, and the euro is falling against other major currencies, where is it that money can go?
Some money has moved into Germany, as bond money from other eurozone countries seeks the safer shelter of German bonds. Money has been flowing into the German bond market, and Germany has benefited from the crisis. The question remains: With a debt-to-GDP ratio of 83.2%, is Germany really all that safe? The Spanish debt-to-GDP ratio is only 65%, and there is much concern about Spain’s solvency.
Some money has flowed into the U.K., which is viewed as a relative safe haven, but still with exposure to Europe. At first, money flowed into Switzerland, but the Swiss stepped in and took measures to prevent their currency from rising too fast. Money is moving to the emerging markets, but these markets carry their own risks, and they are small, so they can soak up only so much money.
Gold may turn out to be the big winner for these reasons. There are two probable results for the eurozone crisis. One is that the European Central Bank (ECB) will start buying eurozone bonds in massive amounts. The second would be the breakup of the euro currency, which would most likely be disorderly. Under these two probabilities, what might happen to Gold?
If the ECB starts printing money, it will need to do it on a massive scale. Most analysts would put this at $2 trillion euros at a minimum, but would the ECB stop there? As a sense of how large an amount that is, the Federal Reserve’s program of quantitative easing (QE) came to a total of $1.85 trillion, which is equivalent to 1.35 trillion euros. The European QE program could almost double the scale of the QE implemented in the U.S. As quantitative easing by the Federal Reserve drove gold prices up, it would be fair to expect quantitative easing by the EU would do the same.
If the second scenario comes into play and the euro currency breaks up, there will be even greater uncertainty in the market. Countries are unlikely to exit in an orderly fashion. Again, in this scenario, Gold prices would tend to go up.
At 8:30 a.m. (CST), the APMEX precious metals prices were:
- Gold price - $1,765.60 – Down $18.40.
- Silver price - $34.07 – Down $0.43.
- Platinum price - $1,626.30 – Down $16.40.
- Palladium price - $656.00 – Down $13.10.