Contagion – frightening but good for gold

Growing contagion

Finance ministers are insisting on a 1.5bn firewall around Greece in order to prevent widespread contagion. These austerity measures have been deemed essential for fear that nonconformity will influence the amount of financial support from other EU states. Avoiding the need to speculate, it will be interesting if the same measures and demands are placed on Spain, Italy, Portugal, and Ireland to name a few.

Contagion for the most part is a dreadful prospect and would transmit negativity rippling

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through the financial markets. In terms of being able to measure the force of contagion, one would look at depreciating equity indices, the falling value of the Euro and unemployment. Confidence is a major factor that underpins the stability of the market but this can also be measured in the rising price of gold. Since April 2010 gold has risen by almost 62%. Weakened confidence within financial markets and contagion thereof are the single largest contributor to rising gold demand. The fundamentals that support a rising trend for gold are often misconstrued. Its not that Gold has become more expensive; more accurately it takes more (depreciating) currency to buy the same amount of gold. Over the next few weeks, I will be looking at the following issues and how they affect the price of physical gold:

  • Inflation
  • Unemployment
  • Devalued Currency
  • Terrorism
  • Interest rates

Physical Gold’s Latest Gold Market Observations

Underlying worry driving gold market

As we start another week, it seems like the Greek debt crisis still shows no signs of reaching a conclusion.  The debt problems suffered by Greece and many other European nations is no doubt one of the biggest drivers of the gold price for 2012.

As a tried and tested safe haven, physical gold provides the natural way to protect savings and investments in times of economic unrest. I think its fair to say that we’re currently experiencing the most unstable economic period in our lifetime – so gold’s stellar performance and expected continuation of its price gains seems obvious.

While the gold price has risen well since the new year, there is definitely the feeling here that it could well explode at any moment – perhaps stimulated by a market event like a UK ratings downgrade, Greek bankruptcy or the Euro dispanding.

However, like the stock markets, the gold market appears to be waiting for some clarity from the Greek bailout plan. It seems the German cabinet is split over whether or not Greece should be helped out as Europe’s governments are due to provide a much larger share of this loan than they did with the Eurozone’s three previous bailouts.

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There are also the lingering doubts that Greece will not be able to stick to the harsh austerity measures imposed upon them.  With Greek elections also on the upcoming calendar, a change of leadership may also see a different approach and commitment to the crisis.

Don’t wait to buy gold

The key from an investment perspective in my opinion is to stick to the age-old adage with gold. Don’t wait to buy gold, instead buy gold then wait. By the time Greece go bust, the IMF are unwilling to provide any more funds or the domino effect in Europe shows its ugly head, gold would already have rallied. If you’re concerned about the effects such economic collapse could bring to your wealth then it makes sense to own some gold now so you’re prepared for any developments in Europe.

Proactive investors who look to spread their risk and assets will be the survivors when the smoke eventually clears.


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Insider's Guide to gold and silver