Martin Murenbeeld of Dundee Wealth Economics says that the continuation of the euro zone crisis will help push gold to higher price levels. He goes on to say that while many investors still focus on the Fed and whether or not they will consider another round of quantitative easing, its the euro zone crisis that will ultimately play a major factor in gold prices.
Author: Geoff Candy
Posted: Thursday , 12 Apr 2012
With all the focus on whether or not the US Fed is considering another bout of quantitative easing and what this may or may not mean for the gold price, the euro crisis has taken a back seat in the minds of many in the gold sector.
But, for Martin Murenbeeld , chief economist at Dundee Wealth Economics, the euro crisis is a major factor and one that will have an impact on gold.
Speaking at the Precious Metal Summit in Geneva on Wednesday, Murenbeeld outlined three scenarios for the euro zone:
1. The European project struggles on, aided and abetted by further fiscal and political integration.
2. There is an orderly breakup of the EU whereby Portugal, Spain and Italy are ring-fenced in some manner against the Greek contagion.
3. There is a disorderly breakup of the EU
Murenbeeld believes there is roughly a 5% likelihood of scenario 1 coming to pass, a 40% chance that scenario 2 will occur and a 55% chance that there will be a disorderly breakup of the euro zone.
And, he said, with or without a break up of the EU, the euro zone is on a path to devaluation. "The Southern European nations are out of whack, they are uncompetitive."
But, he pointed out, it is not just the Southern economies that are in trouble, pension liabilities across the region are "out of sight" and, because the PIIGS nations were able to borrow at effectively the German rate during the early years of the EU, European banks are currently ‘on the hook' of the Southern economies to the tune of around $2 trillion.
This all has a number of significant implications for the gold market. All three scenarios sketched above, Murenbeeld explained, will require further liquidity to be pumped into the system, while a disorderly breakup of the region will mean, not only more liquidity but, also significant devaluation of the departing currencies against gold.
And, he said, "Liquidity either has to be borrowed or it has to be printed, there is no other way to get it and it is a very important driver of the gold price."
If the euro zone manages to survive, there will have to be further internal deflation and recession in the southern parts of the region. And, there are likely to be transfer payments or euro bonds needed to prop up the system.
A suspect currency
The other main result of all this uncertainty, Murenbeeld said, is that the euro is becoming a suspect reserve currency in the eyes of the rest of the world. As a result, emerging market central banks are being pushed toward gold as a non-fiat currency and the signatories to the Central Bank Gold Agreement are "likely to realise that selling gold is a dumb thing to do."
"When no one will accept an IOU from you, that's when you want gold and central banks are remembering this."
During the question and answer session he did add a caveat, however, "If there is a breakdown in Europe, there might be a Pavlovian reaction by traders and a flood of money back into the dollar."
Where to from here?
Despite the gloomy scenarios painted above, Murenbeeld does not believe gold will shoot up as high as some commentators would expect. His most optimistic projection for the average gold price for 2012 as a whole is $1,855 and his most conservative estimate is $1,534.
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