Gold price capped by move to 'risk' trades

Renewed hope that key eurozone nations will agree to a new bailout for Greece encouraged gains on world stock markets yesterday, with German chancellor Angela Merkel and French president Nicolas Sarkozy standing by commitments to help Greece remain in the eurozone. The yield on 10-year Greek government bonds now stands at over 25% – a cost of borrowing that is clearly unsustainable without financial help from other European countries.

The gold price continues to consolidate above Jim Sinclair’s key price level of $1,764, though both it and silver came under selling pressure yesterday as hedge funds moved back into stocks on the “good” news regarding France and Germany’s support for Greece. With regards silver prices, as the Got Gold Report notes in its analysis of the latest silver COT report, there appears “much less confidence on the part of the commercials for lower silver prices than last year when their net short positioning was much higher and silver prices were much lower.” The silver price is a coiled spring ready to shoot higher.

The continuing problems in Greece have many analysts and investors fearful of the kind of credit crisis that could make 2008 look like a mere warm-up act. As Poland’s finance minister Jacek Rostowski has noted, Europe’s sovereign debt crisis threatens not just the survival of the current eurozone, but the actual European Union itself. If – owing to the strains of the debt crisis – countries were to leave the eurozone, this would deal a serious blow to the ambitions of those who favour continuing European political integration. This would call into question the EU’s entire raison d'être, leading to a loss of legitimacy that could have profound political implications for the continent.

For this reason, EU officials will be straining to maintain the eurozone in its existing form, with European Commission President Jose Manuel Barroso putting forward proposals for “Eurobonds” that would be issued jointly by eurozone nations. But this is of course a politically toxic proposal in Germany, with many Germans understandably annoyed by the notion that they should pay to support more profligate EU states. Thus, it seems only a matter of time until the European Central Bank is forced to resort to money printing on a massive scale in an effort to maintain the eurozone.

In other news yesterday, the UK’s Consumer Price Index (CPI) rose last month and now stands at 4.5%. Establishment economists in Britain are of course talking about this as a “temporary” surge in prices that will subside in the coming months. But with the Bank of England said to be ready to embark on another round of money printing, this looks unlikely to say the least.