Gold can’t hold gains despite Eurozone crisis

In the Lead: “Rome is Burning”

The world’s third largest bond market, Italy, teetered on the brink this morning and the situation prompted Bank of America Merrill Lynch to caution global investors about the potential for a “tail risk scenario” of the most unpleasant kind. The bank’s analysts warned that further erosion in that country’s bond market could result in the derailment of the emergent global economic recovery and that financial markets would not take such developments in stride.

Among the few possible solutions to the spreading credit debacle offered by BofA was the suggestion that the EU’s leadership considers “strengthening” the European version of TARP, also known as the EFSF (European Financial Stability Facility). The risks to the euro that the cautionary note from Merrill implies are all too obvious, so we shall leave them implied. Anyway, the raging Italian-focused jitters continued to unnerve global markets this morning and kept the pressure on the commodities complex as well.

The aggravating peripheral Eurozone government debt situation not only has investors throwing the euro and European equities overboard, but it has reignited bets on the potential breakup of the union (and with it, the currency that holds it together).

Now, just in case one concludes that the picture above presents a bleak prospect for investors in all things European, well, you might want to hold that thought for just a moment. Marketwatch’s Robert Powell tenders the opinion that the failure to raise the US’ debt ceiling by the August 2nd deadline would have a truly devastating effect on ALL markets: bonds, stocks, money markets, commodities, etc. Mr. Powell cites CFA Greg McBride who argues that the meltdown of 2007-2008 could be labeled as a mere hors d’oeuvre for the feast of the bears that might come in the wake of a no-deal debt deal in America.

Mr. McBride minces no words and declares that the event would prompt a “rapid re-pricing” of all financial assets, not just Treasuries. In other words, the value of your 401(k) plans, IRAs, 529 plans, gold and real estate will all collapse.

And the reason for that is this: What is fundamental to the pricing of financial assets is the notion that U.S. Treasuries are risk-free. All financial assets are priced based on this assumption (or hope). If Treasuries are no longer risk-free, then all financial assets have to be re-priced against another benchmark.

And this time, investors won’t have a safe haven to which they can flock as they did during collapse of 2008. “There will be no place to hide,” said McBride. “Treasuries will no longer be safe in the event of a default.” Ditto real estate, gold, and farm land. In short, there will be no flight to safety because no asset will be safe. “Even cash might not be a safe haven.” No exit. No safety net. None.

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