Gold rates hit a new high above $1600 on Monday as a result of a powerful cocktail of economic uncertainty, tough US deficit ceiling negotiations, European Union sovereign debt issues and the threat of contagion to the banking sector.
Taken singly, the US debt ceiling impasse or the ongoing EU sovereign debt crisis would be sufficient to trigger a gold rally. But together, the have an effect on on gold costs is even even more bullish, as investors become wary of USD and EUR assets and seek a secure haven in gold. Based on this, we think the bullion rally is most likely to continue till tangible progress is created on relieving at least 1 of the sovereign debt concerns.
On Friday, the outcomes of a tension test of European banks were released. Eight of the 90 European banks surveyed by the European Banking Authority failed the tension test, well beneath market place expectations, that as a number of as 15 lenders would will need much more capital to withstand a prolonged recession. In spite of enormous bailout packages being discussed by the Euro Zone Leaders in Brussels next week, the Euro zone nevertheless looks highly unstable and Italian and Spanish government bond yields have risen sharply. Ongoing uncertainty more than the capability of European officials to agree on a second aid system for Greece and quit contagion from Greece's troubles spreading to other countries such as Spain and Italy continues to worry investors.
The European debt crisis is most certainly not going to go away. If Greece defaults then it appears most likely that Ireland and Portugal would follow suit practically promptly, and then the pressures on the much additional considerable economies of Italy and Spain would be close to overwhelming. European banks could crash and with the interconnections inside the global banking method, lots of non-European banks could collapse as nicely.
The market's focus now appears centred on US economic problems, with slightly much less emphasis on EU sovereign danger problems. Congress need to raise the $14.3 trillion limit on America's borrowing by 2nd August or the government will run out of money to spend all its bills. The White House and Republicans are wrangling over spending cuts and higher taxes in addressing how to bring down the deficit.
The longer the US debt-ceiling talks drag on, the extra supportive they are for gold. If agreement can not be reached on raising the ceiling and, failing a Presidential "bending of the guidelines", the U.S. itself could go into technical default in two weeks' time and the psychological monetary repercussions of this could be huge. One particular suspects that a compromise will be reached at the 11th hour, but if discussions continue beyond the deadline, the United States could be stripped of its top-notch credit rating.
Gold is re-emerging as an international retailer of worth and investors and people who recognise this will continue to . It seems that in these times of tumultuous alter, much more persons and banks around the globe are becoming much less comfy holding dollars and would rather invest in gold.
