Gold prices opened lower this morning, following yesterday’s consolidation pattern. Stocks were mixed and silver also trended lower in early trading. As has been the case for several weeks now, all eyes are on Europe as officials there work to find a permanent solution to regional debt woes.
Yesterday French President Nicolas Sarkozy and German Chancellor Angela Merkel held a joint press conference in which they announced a new proposal to create a more uniform fiscal policy for EU member states. The life this announcement breathed into the markets was very short lived however as credit rating agency Standard and Poors announced that the credit worthiness of the entire region is under review. It is expected now that S&P could downgrade 15 EU member states, including the regions two most powerful economies, France and Germany, and the European bailout fund.
Though the thought of 15 major nations’ ratings being downgraded simultaneously is a bit scary, it’s not really news so far as the market is concerned. Investors lost confidence in Europe some time ago and at this point, the rating agencies are catching up with the sentiment that’s been on the street for some time. Namely, there is little confidence that the European Union will be able to stave off disaster. This sentiment however may prove faulty in short order.
The idea that European nations would somehow rather allow the currency union to fall apart than relinquish some of their own autonomy is ludicrous. At this point, there is one major issue standing in the way of region wide bond market stability, and that is the European Central Bank’s inability to directly lend to member states. This was written into the original EU charter as a means for promoting long term currency stability and value. The thought process was that if the central bank could not print and lend money that politics would not stoke the fires of inflation; a frequent feature of fiat currency systems. This policy however, has set Europe at a distinct disadvantage in terms of their ability to deal with the new global reality.
As the United States navigated the economic crisis of the last three years, the Federal Reserve has added trillions of dollars of toxic assets and loans to its balance sheet, an action which the European Central Bank has not been able to do. In short, the US has printed its way out of the worst part of the crisis. In the end, the European Union needs to do the same thing or else risk complete collapse and loss of competitive advantage in the export markets.
Though these issues in Europe have put short-term downward pressure on gold which is reacting to the artificially inflated dollar, the long term picture will likely be quite different. If the EU does fail to create a consensus to change the European Central Bank’s charter, gold could certainly suffer in the short term. Keep in mind though that doing so would basically spell the end for the EU as we know it; a result that is unacceptable to policy makers there. In the end, Europe, like the US, will print its way out of this mess. They won’t do it because it’s a good idea. They will do it because it’s the only way to keep the wheels on the wagon. Like all monetary expansions, an action like this will be extremely positive for gold in the long term.
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.