Gold now on the way to a new historic high

In assessing the development of the gold price in the previous week we were correct, but the main reasons for the increase were the continued fear of a default of  Greece as well as a contagion of Portugal and Spain. But as long as the investors act out of pure panic and do not reflect the fundamentally different situation in other countries of the eurozone, a continuing flight to the safe harbour of gold has to be expected. The next goal is a rise to a new historical high above 1,226.1$/oz. 


After Standard & Poor's has already down graded the rating of the two Iberian countries, now Moody's  threatens to lower rating of Portugal’s creditworthiness. Spanish bonds at an auction had to be offered a higher return, but the demand exceeded expectations. This underlines really that Spain can continue to finance on the capital and is far from a bust. However, since the ECB had not discussed in their meeting on Thursday the purchase of government bonds in the secondary market, the market fell again in panic. 


The Greek Parliament has approved on Thursday the austerity package negotiated by the Government with the EU and the IMF. In Germany, the aid package for Greece, as was expected, has found a broad majority in the Bundestag and Bundesrat on Friday. The Act came into force on the same day. The Federal Constitutional Court has rejected an emergency petition to stop the credit disbursement to Greece. Therefore, the conditions exist that Greece receives timely financial resources to be able to afford this month pending redemption and interest payments. Nevertheless, the market has not calmed down. 


Gold could also benefit from falling prices on the international stock markets, particularly on Thursday after the Dow Jones index within minutes fell by almost 10% compared to the previous close. As long as it is not clear what caused this plunge, the nervousness in the equity markets is likely to prevail, as it has shown so well on Friday. This then remains for gold also a positive factor. 

On foreign exchange markets the euro is under continued pressure against the major currencies. Against the US dollar, the euro fell within a week up to about 8 cents to $ 1.252. In particular, the comments from U.S. analysts and investors are negative about the prospects for the euro. Some commentators even argue that Germany could leave the euro. This argument is absurd, given the advantages Germany pulls out of monetary union. But it could be repeated in the case of a defeat of the ruling parties in state elections in North Rhine-Westphalia. 

The EU leaders, at their meeting on Friday announced that the institutions of the EU were decided to fight against speculations and attacks against the euro and the monetary union. They have thus, in the words of former U.S. Treasury Secretary Hank Paulson during the financial crisis in 2008, put the bazooka on the table. However, this is not enough any more. The EU institutions also need to use it to calm the situation in financial markets. This would require that also the ECB supports the measures. Both, interventions in the foreign exchange market and the direct purchase of government bonds from the periphery of the euro zone on the secondary market, would be necessary. Only if speculators are forced to cover their short positions in the euro and the government bonds of Greece, Portugal and Spain, it may lead to a sustainable stabilisation. For gold, this is by no means negative. First, a recovery of the euro should stimulate demand for gold rather than be a burden as some investors who bought gold as a hedge against a state bankruptcy, are likely to remain sceptical and are expected to hold their stocks. Second, some market participants might classify the necessary measures of the ECB as inflationary, if the liquidity provided will not be absorbed otherwise. Gold could very well rise to a new historic high.