GOLD PRICE NEWS – The gold price climbed toward $1,700 per ounce Wednesday, rising as worries over a fresh deflationary pulse waned.  The price of gold surged $27.50, silver rose $0.91 to $32.98 per ounce, and S&P 500 stock futures gained nearly 1% to 1199.20.  Weakness in the U.S. dollar – driven by rising confidence that European policy makers stand ready to recapitalize their ailing banking system – helped fuel the rise in stocks and commodities.

On Tuesday the gold price slid $10.78, or 0.6%, to $1,666.42 per ounce as traders took profits following Monday’s 2.4% advance.  The spot price of gold climbed to $1,683.00 early yesterday morning, but later sank below $1,660 before paring its losses.  The SPDR Gold Trust (GLD), the most liquid gold price proxy in the financial markets, retreated $1.08, or 0.7%, to $162.19 per share.  Despite the recent correction in the price of gold, assets in the GLD fell less than 5%.

In contrast to the gold price, silver finished modestly higher, by $0.10, or 0.3%, at $32.20 per ounce.  Precious metals equities were mixed, with the Philadelphia Gold & Silver Index (XAU) inching lower by 0.2% to 193.47.  Notable decliners included AngloGold Ashanti (AU) and Newmont Mining (NEM), which fell 0.7% and 1.3%, respectively.  On the positive side, Yamana Gold (AUY) climbed 2.6% and Silver Wheaton (SLW) added 1.8%.  Gold mining stocks moved higher early Wednesday, following gold prices on the upside.

The broader equity markets were mixed as well yesterday, with the Dow Jones Industrial Average (DJIA) dipping 0.2% to 11,416.30 and the S&P 500 rising 0.1% to 1,195.54.  In currencies, the euro initially slid to 1.356 versus the U.S. dollar as the European sovereign debt crisis continued to weigh on the minds of investors.  Despite yesterday’s decline, rising confidence in the ability of European leaders to prevent a system-wide shock stemming from the eventual default of Greece has helped boost the single European currency in recent days.  The euro gained over 1% to 1.378 against the U.S. dollar this morning.

Dr. Martin Murelbeeld, chief economist at Dundee Wealth Economics, discussed the euro zone debt crisis in a report published on Tuesday.  He argued that the European Central Bank (ECB) needs to significantly expand the size of its bailout programs to adequately shore up the banking system.  A “bazooka” in the range of a €2 trillion – as opposed to the €440 billion European Financial Stability Fund (EFSF) – is necessary, according to Murenbeeld.

“Of course, Greece will default,” Murenbeeld added.  “But that is exactly why central bank money is required.  Such a default will have massive repercussions through the Euro-banking sector. To stop an ensuing bank run the lender of last resort – the ECB – will have to lend governments money with which to top up their banks, regardless of how solid such paper really is.”

As for the gold price, he predicted that it “will likely trend sideways, within a fairly wide band, until such time as the ECB/EFSF readies the aforementioned bazooka, which it will inevitably have to do when a major bank default occurs.”   Murenbeeld – a long-time gold bull – also noted that “We are fundamentally bullish on gold, regardless of recent trends.”

“If 2008 is a guide then there is a chance” that the gold price’s 200-day moving average “could be tested in due course,” Murenbeeld contended.  “Pressure continues to build for a European policy response however, so we cannot rule out a sudden updraft in the gold price on the back of new monetary policy initiatives in Europe. Leaders seem to agree that something needs to be done but, as of yet, the ‘bazooka’ is nowhere to be seen.”

David Rosenberg – another long-time gold price bull – offered similar advice for Europe in a note to clients on Tuesday.  “No doubt it is good to see EU policymakers shift from denial to acceptance but the reality is that the extent of the bank recapitalization needs to far exceed any government’s capacity to remedy the situation in its entirety.”