Gold traded mostly sideways this morning, shedding pressure from a stronger dollar to maintain its grasp on the $1790 level. After breaching $1800 per ounce yesterday, gold has paused, looking to Europe for further direction. Stock markets were sharply lower this morning. While gold and silver have held on to most of the gains made in the last week, the DOW is off by more than 240 points.
Italian Prime Minister Silvio Berlusconi announced this morning that he will heed calls for his resignation, which have grown louder over the last two weeks. Under pressure from opposition parties as well as from members of his own ruling coalition, the embattled Berlusconi announced that he will step down after successful passage of an economic overhaul bill. The problem is that as of yet, the reform legislation has yet to be written. The senate there was expecting the bill, aimed at cutting spending to sustainable levels, to be written and ready for a vote last Thursday. Now almost a week later, with no bill yet in existence, concerns are mounting as to Italy’s ability to break political gridlock and address their fiscal woes.
As all this is happening, the markets are responding by driving Italy’s borrowing costs through the roof. The yield on Italian 10-year bonds topped 7% today, which has proven a significant tipping point several times in the past. It was the 7% level that drove Greece, Portugal, and Ireland to demand bailout packages from the EU. At these levels, Italy will not be able to continue borrowing to finance daily governmental operations for much longer.
The EU’s solution to skyrocketing bond yields in the past has been to simply throw money at the problem. When Greece first came to the union, hat in hand, the amount needed to stabilize the Greek bond market was around $200 billion. For Italy, the number is some ten times that. Some analysts say that an EU intervention into the Italian bond market would need to be north of $2.6 trillion. As we saw in Greece, the first round of bailouts may not do the trick, so the real number needed to save Italy is probably north of $3 trillion. With the current political and economic condition of the European Union, that number may as well be $100 trillion. It’s simply way too large to even consider.
At this point, the future of the Euro really rests on Italy’s ability to right itself without outside assistance. If they fail to do so, all bets are off as to what will happen with global markets of all types. Needless to say, gold will play a crucial role in this scenario as investors look for shelter.
What makes matters worse is the fact that here at home, the deadline for the congressional Super Committee to produce it’s promised budget cuts is less than two weeks away. This sets the stage for simultaneous fiscal battles and gridlocks both here and in Europe. With both the Dollar and the Euro fighting for their lives at the same time, it does not take a professional economist to predict gold will benefit handsomely. So if you already own gold, grab some popcorn and have a seat. This could get very interesting, very quickly.
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.