Gold prices rose by more than $25 per ounce this morning, adding to yesterday’s rise and continuing a strengthening uptrend that has investors again talking about $2000 per ounce. Today’s move comes as a significant rift is developing in Greece, which could end with the resignation of Prime Minister George Papandreou.
Key Greek ministers are now calling for the Prime Minister to step down in response to his controversial decision to hold a referendum on the proposed austerity measures which are conditions of continued financial support from the European Union. The fear that such a referendum might fail sent shockwaves through markets earlier this week as it again raised serious concerns about a disorderly Greek default.
Interestingly enough however, gold did not correct as sharply on this week’s news as many had expected. At the moment, what’s good for Europe is good for gold as both gold and the Euro are locked in reverse correlation with the dollar. As the situation in Europe worsened earlier this week on news of the proposed referendum, gold held its ground above $1700 per ounce, indicating that investors are not eager to abandon their positions. This marks a sharp change from a few weeks ago, when the slightest hint of bad news out of Europe was causing havoc in the gold market.
With today’s news, it looks possible that the Greek government may simultaneously cancel the referendum and oust Prime Minister Papandreou. If this happens, it will certainly be price positive for gold prices as it will bring some short term stability back to the Euro zone.
In addition, the European Central Bank has announced its first policy change under the direction of its new Chief, Mario Draghi. In a break from his predecessor’s tightening policies, Draghi announced a cut to the banks benchmark rate, bringing it down a full quarter point to 1.25%. Such a move is breathing a bit of life into stock markets this morning, which are responding positively to the looser monetary policy. Of course the flip side of that coin is the fact that each move to loosen fiscal policy adds more fuel to the inflation fire. With both Europe and the US committed to long term low interest rates, there is very little that can stand in the way of higher gold prices once they get moving.
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.