The price of gold took a slight dip in the wake of Europe’s election
mayhem on Sunday. Regardless, there was a telling uptick in safe-haven
demand for the metal. Look no further than Europe to realize why that
might be. Europe is in tatters, to say the very least, and there are
growing signs to suggest that Greece was only a mere appetizer. The
European cauldron continues to boil incessantly and has escalated in
such a manner that has made gold look very, very appetizing indeed.
In the words of David Rosenberg, chief economist and strategist at
Gluskin Sheff & Associates in Toronto, “Europe is a mess:
politically, economically and fiscally”. For a while now, European
leaders have been pushing for austerity measures and it has become
painfully evident; not only have these measures failed, they have in
fact exacerbated the problem.
“Immediate austerity, in recessionary economies, simply doesn’t
work”, according to David Kelly, chief market strategist at J.P.
Morgan.Stimulus payments have in the past been successfully repaid in
growth; look no further than the recent revival of the American
automobile industry. But the euro-zone is one with multiple causalities.
You can’t expect austerity measures to successfully allow Greece to
grow out of its debt, not in the least when 7 other economies in the
Euro-zone are also in recession. The election of François Hollande has
now compounded Greece’s problems by significantly clouding the outlook
for the country. It remains to be seen if his actual drive against
austerity will prove as powerful as his election rhetoric would make it
seem. If so, there is statistical chance that Greece may eventually
leave the euro-zone.
But it is perhaps telling that Greece has already taken a backseat as
others have stolen the spotlight, emblematic of the expanding economic
disrupt. Spain has become the new Greece. Unemployment in Spain is now
amongst the highest in the developed world, totaling 24.4 percent, and
the majority of those affected are in their early twenties, the
generation of the future. Of the €298 billion in Spanish loans tied to
property developers, more than 20 percent are non-performing. Spain’s
banking sector is deteriorating rapidly and the country is facing
widespread political unrest. Standard & Poor’s decision to downgrade
Spain’s sovereign credit rating to BBB+ should have come as no
surprise, but nonetheless, it sent the alarm bells ringing. The move
will have a dire impact on Spain’s borrowing costs and will set interest
rates sky high as investors seek to compensate for the higher risks
involved.
Belgium, Ireland, Italy, the Netherlands, Portugal, Greece, Slovenia
are also in recession. Beyond the euro-zone itself you can add Denmark,
Czech Republic and now the UK to that list. Mr. Rosenberg stated, “in
less than two years, we are now up to a total of seven European leaders
or ruling parties that have been forced out of office, courtesy of the
spreading government debt crisis…even Germany’s coalition is looking
shaky in the aftermath of the faltering state election results”. The
crisis has been escalating for two years now, and although it has
compelled Asian and North American economies to distance themselves in a
bid for damage limitation, there is only so much that can be prevented.
If Europe further deteriorates, there will likely be far-reaching
implications on the global economy.
For now, US treasuries, the US dollar and German bonds are still
considered safe-havens for investors. But if the euro-zone crisis
rapidly escalates, that might change very fast. That is why it was
telling that today’s markets saw a slight uptick in safe-haven demand
for gold. Many are already positive that gold is in for another bull
cycle. What is certain is that Europe, and the course it takes over the
next few weeks and months, will prove the defining factor for gold.
Source; http://www.wealthwire.com/news/metals/3151
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