2011-09-16

Gold price plunged below $1,800 per ounce Friday morning

The gold price plunged below $1,800 per ounce Friday morning with profit-taking in the gold futures market fueling the sell-off.Gold price stabilized near $1,782 after the European Central Bank announced “dollar liquidity” measures in cooperation with the U.S. Federal Reserve. With Greece on the verge of default, central banks are furiously attempting to inject confidence into the international monetary system.

While equity markets may therefore have more room to run in the short-term, the facts remain that with Greek one-year yields over 140% and ten-year yields near 25%, the credit markets are saying that it is a near certainty that Greece will default.

Kyle Bass, founder of hedge fund Hayman Capital, elaborated on this dire outcome in an interview with CNBC yesterday. Bass – who correctly has been bullish on the gold price and bearish on the euro zone for the past several years – argued that a Greek default is inevitable due largely to the fact that the nation’s significant debt burdens dwarf its ability to generate economic growth. “Greece has to default,” Bass contended. “It’s going to be a hard default, and then it’s going to be difficult to contain the contagion.”

Although Bass did not directly discuss other European nations facing debt challenges – such as Italy, Portugal, or Spain – the contagion he alluded to may mean a default for other members of the PIIGS. Moreover, Bass noted that there is no enforcement mechanism currently in place by which Germany and France can ensure that the PIIGS properly implement austerity measures and meet economic growth targets.

As for the gold price, while Bass did not focus on it specifically, the dire economic outcome he forecasted is likely to be beneficial for the yellow metal over the longer term. “The world is going to be a more destabilized place a year from now,” he contended.

During past periods of significant financial instability, policymakers across Europe and the U.S. have shown that their response is to drive interest rates lower and print money to try to stimulate their economies.

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