Don’t Panic About Gold

Mon, Dec 19, 2011 - 8:57am

For those of us watching the gold markets—that is, those of us anticipating the collapse of the euro and the eventual collapse of the dollar—the last week has been a scary ride: Gold has fallen over 8.6%, from a high of $1,730 on December 7 to $1,580 on December 14.

"What the...", I can practically hear everyone say. The fundamentals would point to gold being a safe haven play—it should not be falling: If anything, it ought to be rising.

But a fall of 8.6%? In a week?

The first thing that pops into my head is, Don’t Panic!!

The second thing that pops into my head is, This is to be expected—and is only a temporary pullback.

Let’s take the second notion first: The reason the fall in gold is to be expected—and the reason it might well fall further—is because of the euro.

As is becoming increasingly obvious, the eurocrats trying to sort through the European Debt Crisis don’t have a clue as to what they’re doing. They’re meeting—constantly—and wringing their hands—constantly—but they’re not actually getting anything done: They’ve become deers in the deadlights.

The obvious solution which would calm the markets and restore a semblance of normalcy would be for the European Central Bank (ECB) to act as the “lender of last resort”—that is, to print the eurozone out of trouble, just like the Federal Reserve has done with its iterations of Quantitative Easing.

Caveat: I’m not saying this is the right solution—I’m saying that this is the obvious, expeditious solution which would calm the markets.

But the ECB is not doing this—and apparently won’t be doing this—mainly because of German pressure: The ECB is sitting tight, not printing, letting the debt situation spiral out of control as the European Commission tries—and fails—to come up with a Grand Solution.

How is the debt crisis spiraling out of control? Well, sovereign debt yields are rising, to the point where Greece, Ireland, Italy and now Spain’s debt is becoming impossible to service—even as major funding requirements begin to loom on the calendar; the February–May period of next year is looking particularly ugly, on a Continent-wide basis. In fact, even the Germans are having a hard time selling debt, as was seen by last week’s failed auction of €6 billion worth of German bonds: They only managed to sell €3.6 billion, at a paltry bid-to-cover ration of 1.1. And this is the Germans we’re talking about!

This leads the markets to realize that it is only now a matter of time before the euro breaks up. The very reason that the ECB is not doing its own version of QE—fear that the euro will weaken irretrievably—is the very cause for the irretrievable weakening of the euro. The proposed Stability Pact that the United Kingdom famously vetoed last Friday—and which so dominated the news for a few cycles—was a side-show: Everyone realizes that the euro is through.

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Novelist, Filmmaker, Economic Commentator