ECB intervention could send gold 25% higher.
Over the past several months investors braced for a potential Greek default, Spanish bankruptcies and an Italian bank panic. Obviously, Europe has not been a stable place this year.
However, European politicians have promised to do what it takes to save the euro. Though those politicians haven’t announced a solution, many experts believe that the ECB will end up providing unlimited funding in an effort to support government debt.
By providing unlimited funding for Greek, Spanish and Italian bonds, the ECB can prevent interest rates (and payments) from soaring in the event that investors panic. Stable yields will also make it easy for policy makers to forecast budgets because they can better calculate future interest payments.
The ECB and EU are likely to follow in the footsteps of the Fed’s Ben Bernanke. In doing so, they are likely to decrease the value of the euro in just the same way the dollar decreased since 2008. That decline could be what sends gold over $2,000.
Record high levels of debt and a weak currency will haunt us for generations.
Each time the U.S. expanded its balance sheet, the dollar lost value. With the help of this chart, it’s clear to see that a major ECB intervention would result in higher gold prices.
The chart shows the price of gold since 2005.
The yellow squares mark where the Fed intervened in the market to support bonds. As they did, gold moved higher (as the dollar fell).
During the first intervention gold prices moved over 50%, accelerating over $1,200. The second increase in gold wasn’t nearly as dramatic as the first. Nevertheless, gold still managed a greater than 10% increase.
The Fed intervened for a third time, but not by nearly the same magnitude as the previous two times. In this instance, we can see (green arrow) there was a huge run-up in gold prices ahead of the announcement.
No matter what the amount of each monetary program was, gold prices increased each time the Fed supported interest rates. The same will again be true for gold prices should the ECB protect EU bond yields.
Moreover, the ECB may promise unlimited capital for the program. European investors will rush into gold because they will need to defend themselves against currency destruction, paving the way for gold to soar above $2,000.
To the Fed’s credit, it has limited the amount of each bond purchase program to keep a lid on inflation. A purchasing program with an unlimited amount of funding could easily cause a massive amount of inflation, matching (or eclipsing) the 50% increase in gold ignited by Ben Bernanke in 2008.
ECB intervention could be what spurs the rise every gold bug has waited for. Equities and commodities rise when currencies decline, despite grim conditions. Just think, U.S. growth has been slow and employment levels remained low, still gold prices rose over the past four years.
Equities and commodities rise when currencies decline, despite grim conditions. Just think, U.S. growth has been slow and employment levels remained low, still gold prices rose.
A bond purchase program does not have to expand the economy for precious metal prices to appreciate. But precious metals will not be the only investment to rise.
An increase in metal prices is good for miners, who have suffered through lower prices and increased costs over the past 12 months. Because of operating leverage, a 10% rise in gold could easily result in a 30% rise in valuation for a gold miner.
It remains a mystery as to what will solve Europe’s financial crisis. However, one thing is certain about a solution – it will be inflationary.
Equities mentioned in this article: gold