2011-12-08

Further turmoil for the global financial system and a continued favorable environment for the price of gold

The gold price rallied Wednesday on rumors that the European Central Bank will announce a series of new measures to stimulate the stagnant European economy. Gold prices climbed $5.25 to $1,735 per ounce as various news outlets reported that the ECB is considering loosening collateral requirements for banking institutions. Further monetary accommodation by the ECB would likely support the gold price – as well as the broader stock and commodity markets.

Commenting on the gold price in light of the ongoing uncertainty in Europe, UBS precious metals analyst Edel Tully wrote in a report to clients that “Price sensitivity to headlines will persist, if not intensify, and make for jerky market moves…Given the significant event risk, some investors may choose to wait for the picture to clear before taking positions of size, so thin liquidity will also be a potential feature.”

Richard Russell offered a more bullish stance on the price of gold in a recent edition of Dow Theory Letters, the world’s longest-running daily investment letter. He wrote that “The stock market continues to rise on the basis of negative interest rates that are manipulated by the Fed with high hopes that Europe will do what is needed to keep the Euro alive. In this situation Germany’s Angela Merkel has become the Euro fan, which will go a long way to giving life to the Euro.”

“The overriding problem in Europe and the US are debts far beyond anybody’s power to pay off,” added Russell, who turned bullish on the gold price near the start of its bull market in 2001. “So it’s a question of who takes the hair cut and how short the hair will be when the barbers are finished.”

Looking ahead, Russell predicted further turmoil for the global financial system and a continued favorable environment for the price of gold. “The massive amounts of capital that have been thrust into the system by the federal banks will give way to inflation somewhere in the future — probably within the next three years. With it will come higher interest rates and this will finish with the happy times of today. When trillions of dollars of debt have to be rolled over at rising rates the garbage will hit the fan and hit it hard. In the mean time our best method of survival and retaining power will be gold.”

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