Gold prices surged by more than $35 per ounce this morning to post session highs of $1722 while silver also added more than $1. This is a welcome pattern change from last week’s weak finish. Gold looks to be taking heart from several factors which are aligning to push prices higher going into the last month of 2011.
News out of Europe has been generally positive over the weekend as EU officials, led by German Chancellor Angela Merkel, have entered into talks aimed at creating a more unified fiscal policy for the 17 Euro Zone states. There has been little doubt that nations will be forced to surrender some autonomy in the interest of a more stable currency union. These talks are a clear step in that direction and an agreement down those lines may give investors some more confidence in the future of the European Union.
This progress is positive for gold prices in that it has put downward pressure on the intensely overbought US Dollar. The Dollar index slid this morning both on the news out of Europe and on higher than expected retail sales numbers from black Friday.
Though the EU fiscal policy talks are certainly a step in the right direction for the union, there is little doubt that a cut-only approach to solving the debt crisis will simply not work. Though German leaders have been dead set against the idea, calls are becoming louder each day for the European Central Bank to become Europe’s lender of last resort. In essence, this would set the ECB up to step in and create liquidity in emergency situations by buying up sovereign debt. Translation: this would give the ECB the power to print money for bailouts. This scenario is being seen as the best possible case for higher gold prices as both the Euro and the Dollar would then be under severe long-term pressure at the same time.
If that’s not enough, there is one more piece to the puzzle that seems to be quietly sliding into place. While both the US and Europe are heading down the path of looser monetary policy and inflationary bailouts, China has, for the most part, maintained a relatively hawkish monetary stance. Over the last month however, we’ve started to see signs that this is changing.
Though there has been no official word out of China to verify suspicions (and there never really is), analysts are beginning to suspect a policy change may soon be in the cards for the world’s second largest economy. Housing prices are now down over 30% in some parts of the country, while foreign reserves also fell significantly. This marked cooling in the Chinese economy will open the door for policy makers there to employ more aggressive monetary policies aimed at promoting growth. Translation: this would give the People’s Bank of China the room to print money and increase growth. This may prove to be of crucial importance for Chinese exports as cash injections will push the Yuan down in international markets. It’s no mystery that the Chinese have an active interest in devaluing their currency to keep up with the falling Euro.
With this final piece in place, all three of the world’s largest economies are now in position to simultaneously debase and devalue their currencies. In fact, not only is this scenario now possible, it is increasingly becoming the only plausible strategy for all three economies. Without bailouts and loose monetary policies, growth will stall and global recession will likely take hold. If one economy debases their currency, the others will be forced to follow in suit or risk losing the competitiveness of their exports. In a sense, all the pieces have now moved into place for what may prove to be checkmate for global fiat currencies.
With the Dollar, the Euro and the Yaun all sliding simultaneously, there could be no more perfect scenario for drastically higher gold prices. Investors don’t forget that in times like these, they need a currency which is no one else’s liability. That’s exactly why gold prices will continue to act favorably to loose monetary policies. You can bet the time will come when Chinese, American and European banks and politicians will wish they could just print some gold to get themselves out of trouble. Lucky for us, they can’t.
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to firstname.lastname@example.org.