Lynn: Gold Likely Winner After Dust Settles In Europe

With the crisis in Europe expecting to remain an issue for future, investors investing in gold will be the winners once all of the dust settles. Expert Matthew Lynn seeing one of two things happening, breakup of the euro or massive bond buying by the European Central Bank.

By Murray Coleman
November 16, 2011, 2:17 PM ET
Barrons

Gold and silver continue to drop on Wednesday. The SPDR Gold Trust (GLD) was last off by 0.4% and the iShares Silver Trust (SLV) was down 1.8%. But consider that since equities started rallying in early October, GLD’s shares have risen more than 9% while SLV’s have jumped 14%.

But what about an even longer-term view? With European sovereign debt likely to remain an issue for the foreseeable future, London-based financial writer Matthew Lynn — who has written extensively about Europe’s credit markets — takes a look at possible scenarios and their end results over time.

He asserts that once the dust settles in Europe, the only clear winners look to be those investing in precious metals.

German bonds have been the most obvious beneficiary of the turmoil, Lynn wrote in a commentary at MarketWatch. The yield on the 10-year German bond had fallen all the way down to 1.7%, an all-time low, he pointed out. In April, it was yielding more than 3.5%. “Clearly, money has moved out of the peripheral euro-zone countries, and been parked in Germany because investors see it as the one safe havens on the continent,” Lynn noted.

But how safe is Germany? Lynn looks at not-so-great debt-to-GDP numbers and concludes: “It isn’t a safe haven from anything.”

He has similar reservations about U.K. bonds, known as gilts.

A lot of money is going towards emerging markets, Lynn notes. But borrowing levels by banks in those countries are estimated to be at close to record levels. Lynn wrote:

“There is a limit to how much cash can go into those countries, however. Italy and France are two of the four largest debt markets in the world — money fleeing Europe can’t all descend on Poland or Indonesia without creating a huge and dangerous bubble in those markets.”

The two most likely results from the euro zone debt crisis? Lynn sees either:

  • The European Central Bank buying the region’s bonds on a massive scale.
  • The break-up of the currency.

Lynn concludes that if the ECB starts aggressively buying bonds, it will have to flood the market with three or four times as much money as the U.S. Federal Reserve’s program of quantitative easing has undertaken.

“That will inevitably send the gold price spiralling upwards,” he wrote.

Even if just one or two countries pull out, the break-up of the currency union as we know it today is likely to support higher gold prices, Lynn maintains. He wrote:

“In countries that pull out of the euro, gold may well become the only viable currency for a period. It will take time for new currencies to get established, and to secure any credibility …”

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