The Cirque de Europe Rolls On Gold

Posted: May 12, 2012 12:01 AM

It’s been a tough week for gold and prices were down again Friday morning as money flows out of European stock markets.  

Gold was down another $8.20 to $1,585.20 and silver was off $0.34 to $28.68, bringing the silver/gold ratio to 55. 

Commodities are down across the board even though the euro rebounded slightly against the dollar.  Besides gold and silver, platinum, palladium, crude oil, and copper are all down.  Investors are fleeing to cash like a stampeding herd as fear replaces rationality. 

To be fair there’s a lot going on in Europe to feed investor fears.  Greece is getting demands for concessions from creditors before they can even form a government.  A coalition of lenders including the International Monetary Fund, the European Commission and the European Central Bank have given Greece until next month to produce a plan for even more government budget cuts, yet Greece will have to hold another election next month to even seat a government. 

Spain is also in the midst of a banking crisis that forced the Spanish government to take even more measures to clean up their bank balance sheets. 

While the news seems dire, there’s also general agreement that Europe is in much better shape to absorb Greece leaving the euro than they were last year. 

The Cirque de Europe will almost certainly roll up on our shores, but the U.S. has been able to absorb the bad news so far, but it’s not going to last.  Falling crude oil prices have softened the blow here as falling gasoline prices lighten the impact of the European selloff. 

What it all means for precious metals is a continued short-term bearish trend as overseas investors scramble for cash.  Where the bear trend could meet a rapid reversal is if the Federal Reserve starts talking about easing to keep the dollar competitive with other currencies. 

So, for the average investor it all hinges on whether you think the current price correction in metals is a long-term structural correction or a panic flight to cash.  If it’s a panic flight to cash, then at least some of that cash sloshing around in world financial systems will end up flowing to precious metals. 

If there’s enough residual fear in the financial system, a lot of that free cash could end up in gold. 

Chris Poindexter, Senior Writer, National Gold Group, Inc