GOLD PRICE NEWS – The gold price rallied $4.00 to $1,390 per ounce Wednesday on the back of comments from European Central Bank (ECB) President Jean-Claude Trichet that indicated the ECB may step up its purchases of sovereign debt of struggling European nations. Stock prices surged as the gold price climbed within striking distance of $1,400 per ounce on the news out of Europe – and on stronger than expected jobs data in America. According to ADP, companies in the U.S. added 93,000 jobs in November, ahead of consensus expectations of 70,000. S&P 500 stock futures rose 15.60 to 1195.20.
Risk aversion fell as the euro rallied versus the U.S. dollar on the flurry of news. While the gold price is being supported this morning by a weak dollar, over the past month, the gold price has climbed despite strength in the greenback. Investors have fled the euro for the safety of gold, pushing the euro-denominated gold price to a new record high.
Since reaching 1.4276 on November 4, the euro tumbled 9.1% against its American counterpart on the back of growing fears that the challenging debt issues that have plagued Greece and Ireland are spreading to Portugal and Spain. These concerns were also evident in credit default swap prices of Portugal and Spain, which widened Tuesday to new record highs of 552 and 368, respectively, according to data provider CMA. In Wednesday’s session, government bond yields eased following Trichet’s comments.
Causing further pressure on the euro and providing additional support for the gold price was yesterday’s announcement by Standard & Poor’s Rating Services that it was placing Portugal’s ‘A-’ long-term and ‘A-2′ short-term sovereign debt ratings on “CreditWatch with negative implications.” In doing so, S&P indicated that the quality of Portugal’s debt has worsened and may be downgraded within the next three months.
In its report, S&P stated that the decision reflected a view of “increased risks to the government’s creditworthiness,” stemming from “uncertainty about the government’s possible recourse to official funding and the consequences that obtaining such funding could have.” The ratings agency was highly skeptical of Portugal’s austerity measures, saying that it has made “little progress on any growth-enhancing reforms to offset the fiscal drag from these scheduled 2011 budgetary cuts.”
While the rating agency may deservedly be critical of Portugal’s fiscal measures, ultimately it is the market that will decide the financial fate of the “PIIGS” nations. Currently, the rising gold price and falling euro currency are indicative of the disdain for European policymakers’ decisions, which have not addressed the fundamental issue of excessive debt levels. Instead, the European Union has chosen to kick the can further down the road by developing bailout plans that burden these countries with additional debt in order to placate the demands of creditors, which are mostly banks in the UK, US, Germany, and France.
The stopgap measures, as Dr. John Hussman noted in his latest Weekly Market Comment, only exacerbate the problem. “Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side,” according to Dr. Hussman. This shortcoming generally results in additional economic challenges shortly thereafter, as the nation is unable to meet its financial obligations.
The ability of the gold price to remain near its all-time high in the face of both strength and weakness in the U.S. dollar is emblematic of the severity of the issues in Europe. Whether one looks at the response of the Federal Reserve to the financial crisis, or that of European policymakers now, the common ingredient is always more debt and more money creation.
This increase in the money supply has caused investors’ faith in fiat currencies to dwindle, and consequently has led many to turn to the gold price as a means to protect their wealth. The trend of declining confidence in fiat currencies will arrest itself when the balance sheets of the developed world are purged of their debt. Unfortunately, this is politically unacceptable and as such, the upward trajectory in the price of gold is likely to continue indefinitely.
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