Gold prices surged this morning, adding more than $25 to reclaim the $1800 per ounce level. After weeks of range bound trading and consolidation, gold seems to be awaiting the next bit of bad news to resume its run toward $2000. Global stock markets stalled this morning on new news out of Europe. Stocks here at home were hampered by the worst housing starts numbers in three months. Silver also made up lost ground, rising back above the $40 per ounce level as oil stabilized around $85 per barrel.
The situation in Europe seems to be deteriorating by the day, as new discussions regarding Greece’s ability to make needed spending cuts came to the forefront of international news yesterday. After more than a year of severe social unrest and unrelenting cuts to almost every sector of government services, the Greek state is nowhere closer to achieving economic stability than it was at the beginning of the sovereign debt crisis. Calls for additional government spending cuts of up to 40% along with significant tax increases as preconditions for the next bailout package from the EU are being met with bitter resistance from Greek citizens. Needless to say, this story is long from over but there’s little disagreement that it will end with some sort of sovereign default.
The danger of a Greek bankruptcy stretches far beyond the streets of Athens. The fear that such an event could spark a chain reaction of defaults (what they’ve referred to as “contagion”) has investors looking for shelter from the coming storm. Just this morning credit ratings agency Standard and Poor’s downgraded Italy’s debt rating, citing concerns about the nation’s bleak growth outlook and fragile ruling coalition. This comes as a huge blow to Euro zone finance ministers who have been trying to keep the disintegrating single currency zone from being relegated to the history books.
The biggest difference between the economic woes in Italy and those in Greece is simply the relative size of their respective debt loads. While Greek debt is somewhat manageable when compared to the resources available in the Euro Zone, Italy is a different matter altogether. There are no bailout packages being proposed for the Italian state, because it is simply too big. When compared to the various casualties of this global financial crisis, Italy dwarfs them all in terms of size and complexity. The Italian state is not too big to fail; it’s too big to bail out. Then there is Spain. And then there’s Portugal. If the situation in Europe continues to deteriorate (and unfortunately there is no real evidence that it won’t) there is no telling where the bottom for global stocks and currencies might be found.
It’s in this context that the International Monetary Fund issued a statement this morning, saying that the global economy has entered a “dangerous new phase”. In its bi-annual World Economic Outlook report, the IMF predicted that global GDP will expand at “an anemic pace of 1.5% in 2011.” At these levels, debt issues in Europe and the US are unlikely to be resolved any time soon, which will spell disaster in the long term for the two most important currencies in the world.
Through all of this, the dollar has been the chief beneficiary of the unrest and uncertainty. Though no one in their right mind would make an argument for the dollar as a long term safe haven given the growing level of US debt, it has benefited from a short term flight to safety. As investors watch the Euro deteriorate, the dollar has looked relatively good in comparison which has put some downward pressure on gold prices this month. That said, the common wisdom is that the other shoe will drop for the dollar sooner or later. When that happens, gold will be the primary beneficiary. Think about it for a minute. If the Euro falls apart and the dollar is slowly destroyed by inflationary monetary policy and sky high US debt loads, where would wealth be safe? Certainly not stocks, bonds, or real estate. It’s like we always say, the best thing for gold is a lack of competition from other investments. Right now, the competition is getting weaker by the day as gold readies itself for its next move.