News that Standard & Poors had downgraded Italian debt from A+ to A gave gold prices a modest lift this morning in London trading. S&P attributed the ratings cut to weak growth which would limit Italy’s ability to reduce its debt burden; indeed it could be argued that the cuts governments are trying to push through would in all likelihood exacerbate the problem because it would lead to lower personal spending as consumer spending fell and therefore lower tax revenues, leading to a spiral downwards. This is a common theme across Europe where so much spending is dedicated to personal consumption rather than investment in economic infrastructure to generate the means to pay down that debt. Indeed the latest news might rekindle the joke about Europe itself becoming 'sub-standard and poor' itself.
Gold prices have been vacillating just south of the $1,800 level for a few days now caught between good Asian buying on dips and profit-taking on rallies. On the year-to-date gold is exactly in line with the gains made in both 2009 and 2010 at +27%; that performance has been consistent with the VIX index (or fear index) which has spiked above 30 in both the previous two years.
An alternative 'fear index' it could be argued is the number of times "price of gold" is typed into Google as a search term. If that argument holds, then it can be inferred that the background interest in gold during quiet periods is four times greater than it was at the beginning of the bull run in 2001. It can also be inferred that the spike in searches for gold prices a couple of months ago was twice as big as we saw at the height of the Lehman crisis in 2008, suggesting that the recent crisis over U.S. debt ceiling raising and indeed European sovereign debt issues were felt twice as acutely as the financial turmoil in 2008. If nothing else, it tells us just how mainstream gold has become.
Currently Italian 10 year bonds are at 5.67% - which is half way between critical and requiring ECB and IMF support and the level at which it is uncomfortable but manageable. The gold markets will be keeping a close eye on those rates over the next few weeks for developments.
With gold 7% off its peak of $1,920, the onus is on the bulls to prove the case for higher prices and in the absence of significant new developments on the economy, we could foresee a little price weakness from here over the next few weeks.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.