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Gold and the Euro Crisis

Written by Gary North on November 25, 2011

The Eurozone is facing a crisis, as we know. There is not much interest in this by Americans, yet we are connected to Europe through the banks. Therefore, the Federal Reserve will intervene, if it thinks this is necessary.

What will this mean for gold? Here is one answer.

The obvious catalyst is a massive bailout of European nations and European banks through a $3 Trillion debt monetization (the figure stated by many). Until last month the European crisis was limited and a hope of being contained. Since then interest rates on French bonds, which had been following Germany began following Spain and Italy higher. The 10-year yield on French bonds has surged in the past six weeks from about 2.50% to nearly 4%. Meanwhile, Ambrose Evans Pritchard, the intrepid reporter wrote that Asian investors are pulling out of German Bunds and Europe all together. Bund yields (10-year) look to be forming a double bottom just below 2%. Bunds stopped rising in last month as yields surged in Spain, Italy and France. Understandably, Germany has stood in the way of an ECB bailout. However, the sooner the crisis spreads to Germany, the sooner we can expect a German-led ECB bailout.

On Wednesday, Nov. 23, the crisis hot Germany. It could not sell all of its 2-year bonds and hold the rate under 2%. The Bundesbank bought 39% of them.

The crisis in Europe will tempt the FED to intervene and inflate in order to save large European banks. I have written about this here.

The current investor psychology of fear, indifference, and surrender is leaving them vulnerable as they miss the big catalysts that lie directly ahead. Gold and gold stocks remain in excellent position for a potentially tremendous 2012 and 2013. Required action from Europe, a shift in Chinese policy and more monetization on steroids from the Fed is going to catapult the bull market in precious metals like we haven’t seen since the late 1970s.

Any expansion of the ECB’s bond buying will be inflationary. For an analysis, read this.

A word of warning: the writer sells gold-related assets. Remember this rule: “Never ask a barber if you need a haircut.” But sometimes you need a haircut — which is what investors in European bonds and stocks are about to experience.


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