With Europe teetering on a knife’s edge gold has once again resumed its role as the custodian of safe - and perhaps sane wealth. Gold prices firmed throughout late New York trading yesterday where it breached the $1,700 level. The firm tone prevailed during Asian trading hours this morning, when gold traded to a high of $1719.80 before easing slightly. Behind the move higher has been a surge in purchases of gold ETFs as well as ongoing strong demand for physical bars. The ETFs have seen 16.5 tonnes of new gold buying over the last two days which is driving gold higher. It will be interesting to see if the futures traders on COMEX reverse their recent thinking by following suit and drive this market significantly higher.
The speed and nature of the gold price rise seems to suggest to us that gold is back to its old self again and behaving in the manner one might expect, with equities off as gold rallied. That is to say it is rallying during bouts of heightened economic crisis. The VIX Index is modestly firmer underscoring market concerns, while more worrying Italian 10-year bonds are nudging the 6% level (Greece received its initial bail-out when theirs breached 7% - currently at 25%).
In short - gold is back.
The financial markets are giving a very clear signal. They are saying that they doubt that the 27 EU nations will reach an accord on policies to resolve sovereign debt while stimulating economic growth. The market is looking for "specifics" and not "generalities." There is a sense that we have heard too much talk and we need clear, cogent and do-able proposals.
At stake is the potential collapse of the euro and therefore Europe — it's as simple as that. As such gold, which has been behaving more like a risk asset, has reverted to its safe haven role and showed appropriate gains. Whilst inflation may not be with us at present, investors clearly believe it may only be a matter of time. Gold investors clearly recognize that the potential for inflation is now with us and they are buying the physical... put another way, they know that it’s a bit too late to start buying house insurance after there is the clearest smell of smoke in the air.
I don't think any sane person would relish the meltdown of the EU (with its untold consequences) but many will see the current inability of political leaders to gain consensus and support for that may become unpopular political decisions to be endemic to the sort of structure that has been created. That is to say a fragmented decision making process by unelected leaders when these times call for quite the opposite. As such, it is falling to Merkel and Sarkozy to lead the way.
With such epic economic and geo-political themes at play, each with unknown consequences, it is difficult to make forecasts. But the uncertainty that this is creating is almost certain to be gold-friendly and we scope for gold to continue making strong gains from here. As such, we would see the next $100 in gold to be to the upside rather than the downside.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.