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« OPTIONTRADER: 20% in 46 days, Risk and Leverage | Main | Gold Prices at Record Levels in UK and Eurozone »

Gold Prices Move Higher As the European Union Dithers

Gold Chart 11 April 2010.jpg

We'll kick off with a snippet from The Economist in an article they published entitled: 'The Wax Melts' dated 8thApril 2010:

GEORGE PAPANDREOU may have spoken too soon. On April 6th, just three days after the Greek prime minister claimed “the worst is over,” the yield on Greek ten-year government bonds leapt from 6.5% to above 7%. Yields remain at alarming levels, rising above 7.5% at one point on April 8th.

The president of the European Central Bank, Jean-Claude Trichet, told a press conference that “default is not an issue for Greece.” But the D-word is increasingly on the lips of analysts. The cost of insuring Greece’s bonds surpassed that of Iceland’s this week; Greek banks have asked to tap a government liquidity scheme. Far from coming to an end, the Greek debt crisis seems scarcely to have begun.

On the face of it, this week’s renewed bond-market jitters were caused by growing doubts that an emergency-aid package patched together by European Union leaders last month offers Greece much help. Under the terms of the EU deal, any short-term support would have to be approved by all of the 16 countries in the euro zone. German anger at Greece’s profligacy could easily delay the cash it would need should bond markets close.

Sword of Damocles.jpg

The Sword of Damocles

On the Business Hour yesterday, a radio programme down here in New Zealand, they were discussing the plight of the four top banks in Greece where it is rumored that as much as 5% of the cash has been withdrawn over the last week and is believed to have left the country. The worry for the Greeks is that Greece defaults on its debt and leaves the euro, with all the euros in Greece being converted back to their traditional currency, the Drachma. The end result being a dramatic loss in terms of spending power for those still holding the baby when the music stops.

We just cant see this being allowed to happen but they are sailing rather close to the abyss for our comfort. The lack of action creates uncertainty which hangs like the Sword of Damocles over the euro. So worried investors look for safety and as we have witnessed this week the beneficiaries have been the the US dollar and gold prices.

As we can see from the above chart gold prices have made steady progress as the financial plight of Greece has unfolded. We must also note at this point that the US dollar is holding up well and trading at 80.94 on the USD Index. The RSI suggests that gold prices may be getting a head of itself and take a breather after this $80/oz increase in price, however, we would not bet on it at the moment.

What this issue is doing is catching and focusing the attention of investors on the precarious state of a number of the currencies. Apart from the usual suspects of of Spain, Italy, Ireland, Iceland, Portugal, etc, the United Kingdom is not far behind and the United States Dollar is holding up well, for now.

However, the Greeks are facing the music here and now as they cannot print more money to get themselves out of this mess, but the United States can and is printing as though tomorrow will never come. Sooner or later the euro will resolve these issues of a fashion and when it does the focus will once again land firmly on the buck sending it lower. Gold prices will then challenge and surpass its previous highs as it cannot be printed or electronically produced out of thin air.

All gold bugs need now is patience and the guts to keep increasing their exposure to the precious metals sector via the vehicle that best suits their needs, be it gold and silver and their associated mining stocks or the leveraged possibilities offered by an Options Trade.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

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Reader Comments (3)

SINGAPORE (MarketWatch) -- Asian stocks were mostly higher on Monday, boosted by news the European Union had agreed Sunday to details of a rescue package if the Greek government needed one.

"Everyone knew that Greece would be sorted out one way or another," said Macquarie Equities associate director, David Halliday, in Sydney.

"The run we had from early March was partly due to those sovereign risk fears abating. I think it's more the fact that we continue to see orderly and manageable rises internationally. The rally this time is far more logical and fundamentally based," he added.

April 12, 2010 | Unregistered CommenterGold Prices

To whom it may concern:

The "Gold Prices Newsletter" of April 11, 2010 contains a hyperlink to an article from April 15, 2007 entitled, "Gold ready to move past $700 in coming weeks." The article contains the statement:

"These are of course short term fluctuations and when one looks at the bigger picture, they seem somewhat insignificant, given the fact that we believe gold prices are moving much, much higher over the coming years."

Was the inclusion of this hyperlink a "typo"? (Sarcastically, I wonder if it was a subtle reminder that your prediction to readers came true in a remarkable manner.) Regardless of the source of the hyperlink, it saved me the trouble of searching through my archived articles on gold to compare what is happening today with what was predicted only a few short years ago. The article certainly is a timely and reassuring reminder of the increasingly importance of precious metals.

Best regards

April 12, 2010 | Unregistered CommenterPhil

Hi Phil,

Thanks for drawing our attention to this point. The associated articles are selected on a word search basis, so if the article is about Agnico-Eagle, then the word search will attach previous articles about Agnico-Eagle and so no. We do not hand pick the articles, we haven't got the time to do it.

We added this function when readers wrote to us saying that they had to go back through everything to find out just what we had written previously. Mind you articles of a general nature produce some odd results and we get emails deriding us for it, but hopefully we can improve as we go forward.

April 12, 2010 | Unregistered CommenterGold Prices

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