Gold traded solidly higher this morning, after reversing yesterday’s weak start. Up more than $25 today, gold is currently trading around $1783 per ounce. Stock markets are on the defensive this morning, with the Dow moving lower by as much as 100 points in early trading.
Though Fitch Ratings (in a departure from S&P’s position) reaffirmed the US’s triple-A rating this morning, the announcement did little to calm jitters from across the Atlantic as investors digested fresh news out of Europe. Germany, the strongest economy in the entire European Union, saw growth of only 0.1% in the April-June period. This marks a sharp slowdown as compared to previous periods, sparking fears that even the healthiest of EU countries is falling ill like the others.
With the German economy grinding to a halt, serious questions are being raised about the union’s ongoing ability to combat debt problems. The political will in Germany to continue contributing to EU bailout packages has been one of the few saving graces throughout the European debt debacle. There is little telling what would happen to the Euro Zone should Germany begin instituting more protectionist policies in the face of a significant slowdown in their own economy.
German Chancellor Angela Merkel is scheduled to meet with French President Nicolas Sarkozy today to discuss further steps in combating the growing EU debt crisis. A lack of progress in those discussions could signal a change in Germany’s stance toward helping fledgling member states. Such a move could be a death blow to the entire European Union, which many economists believe is hanging by a thread even with the support of the German government.
The majority of the price gains we are now seeing in gold are the result of increased risk aversion from investors across the world. The ongoing instability has been a good friend to gold buyers, and it’s looking as though the trend is set to continue. Near term gold targets are the previous intraday high of $1817 per ounce, and then $1900 respectively. The metal found a solid bottom last night at $1763, where it bounced off support levels before continuing its march upward.
Keep in mind also, that we are just beginning the season for gold. Physical demand ahead of the Indian wedding season combines with increased trade and investment volume as the summer months wind to an end. These factors create the most price supportive season of the year for gold, and the fall months typically see the strongest price increases. Though price levels are high and a correction is certainly possible, there doesn’t seem to be much that can take steam out of the gold market for more than a few days. The question now is not whether gold will hit $2000 per ounce, but rather how long it will take to get there. With any more bad news out of Europe, the answer could be counted in weeks, or even days.