longer-term outlook for the gold price will remain quite favorable

The gold price gave back a portion of yesterday’s gains on Friday morning, falling $7.89, or 0.5%, closing at $1,743.60 per ounce. The modest weakness in the gold price coincided with a firmer U.S. dollar, which advanced 0.2% against a basket of foreign currencies. Silver dipped alongside the price of gold, by $0.17, or 0.5%, to $34.93 per ounce.

The widespread gains in financial markets developed after a European summit resulted in a more robust financial rescue plan to alleviate the sovereign debt crisis. Euro zone officials announced plans to leverage the European Financial Stability Facility (EFSF) by a factor of between four and five and to provide guarantees on the sovereign debt of several other financially-troubled European nations. In addition, bondholders agreed to a 50% haircut on Greek sovereign debt.

Commenting on the European announcement, analysts at Goldman Sachs acknowledged several benefits of the plan, but also remained cautious until further details are revealed. In a note to clients, the firm wrote that “While progress in key areas was made, specific details are yet to be determined and further concrete measures are needed to address the Euro area’s economic challenges in a lasting way… Whether the increase in the EFSF’s indirect lending capacity will lead to a stabilisation of the situation depends on several factors, and there is no guarantee that the revamped EFSF will instil sufficient confidence among investors.”

Looking ahead, the gold price is likely to continue to be supported by uncertainty over the implementation of the new European rescue plans. Furthermore, the leveraging of the EFSF inherently involves more money printing, which is beneficial to the one currency that is no government’s liability – gold. As long as policymakers in Europe and the U.S. continue to fight deflation through rampant currency debasement, the longer-term outlook for the gold price will remain quite favorable.

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