Gold prices opened significantly higher this morning, touching $1785 per ounce as markets digested a slew of new headlines coming out of Europe. Stock markets are trending slightly lower and the Euro dropped compared to the dollar. Silver followed gold higher this morning, adding about 50 cents to top $34.65 per ounce.
There are three main narratives driving global markets as we begin the trading week. First and foremost, Greek Prime Minister George Papandreou has agreed to resign, passing power to a new coalition government in hopes of keeping alive the austerity measures that will ensure cash bailouts from the EU. Without this funding, the nation would essentially grind to a halt as a disorderly Greek bankruptcy would likely throw the entire global financial system into disarray.
Second, it seems France is taking near desperate action in hopes of salvaging their triple-A credit rating which now seems to be in serious jeopardy. French ministers voted on a plan to enforce over $9 billion in spending cuts and tax increases which are meant to show ratings agencies that the nation is serious about dealing with its mounting debt. The concern of course is that with or without the spending cuts, the French economy, like the economies of all European nations, is intrinsically tied to the Euro Zone debt crisis. If Greece falls off a cliff so to speak, the French spending cuts will not mean much in the grand scheme of things.
Then there is Italy. The third largest Euro Zone economy is facing skyrocketing borrowing costs as bond buyers are quickly losing faith in nation’s ability to make good on its debts. As the yield on Italian ten-year paper shot past 6.68%, protesters gathered in Rome, calling for the resignation of Prime Minister Silvio Berlusconi. The increasing instability in Italy is driving European markets lower this morning with stocks down as much as 2%. Of all the trouble brewing across the Atlantic, Italy’s is a very unique case. It is simply too large to rescue with the same sort of bailout packages that have been offered to smaller European states. The irony starting to come to light in Europe is that even if EU officials manage to hold Greece together, their efforts may prove utterly futile if Italy continues its current trajectory.
All of this has caused an interesting conundrum for gold, which has been stuck between a rock and a hard place as the dollar benefits from the weakened Euro. Gold however is finally starting to consistently buck the trend. Days like today, when both the dollar and gold are solidly higher point to the fact that gold is reasserting itself as a safe haven play independent of the swings in the US dollar. This is exactly the type of posturing we need to see from the metal before a possible run at $2000 per ounce becomes realistic. A couple more days like today and it will be fair to say the trend has shifted back to a purely bullish stance, putting the summer correction behind us once and for all.
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.