When the markets get crazy, a good solid hedge is a valuable thing. And we’ve found just that, a commodity that is the “New Gold.”
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In London trading Friday, the spot gold price was up 0.4% at $1,563.71, bouncing from as low as $1,533.41 earlier this week.
The upward move in gold came as the euro rebounded some from two-year lows against the dollar. The euro inched up from early lows against the dollar Friday, although sentiment around the troubled currency remains guarded.
Gold's rise Friday also was attributed to bargain hunting, calmer markets and short covering ahead of the three-day holiday weekend.
This week continues gold's eleven-week downward trend as the state of Greece and the entire Eurozone region has kept world markets on edge and investors jittery.
Worries over Greece exiting the Eurozone prompted heavy selling in the currency this week as the ailing Mediterranean country, operating without a government, faces imminent default.
"Gold's direction seems to be driven more by the level of market risk aversion and the euro currently," BNP Paribas analyst Anne-Laure Tremblay told Reuters. "Market sentiment on gold is fragile at the moment. There have been tentative rebounds, but so far bullish momentum has yet to materialize."
As always, however, there's another side to this story.
From near and afar, there appears to be no easy way out, especially now that the Eurozone is heading back into a recession.
It's times like these when investors pour into the U.S. dollar for its "perceived safety."
With commodities priced in U.S. dollars, this spike in the greenback has sent commodities-including gold prices-into a tailspin since early March.
That has many doubters asking: "Has the commodities super-cycle ended?"
It's a reasonable question considering the Continuous Commodity Index (CCI) is back down to levels it last saw in September 2010.
What's more, gold prices have backed off to near $1,500/oz., and oil prices have fallen from $110 to $90/barrel.
But as you'll see, the commodities coin does have another side.
The Other Side of the Commodities StoryIn fact, a recent article by Frank Holmes, CEO and chief investment officer at U.S. Global Investors, pointed out how China and other emerging nations are in better fiscal shape than much of the West.
Even if China is slowing somewhat, it is still growing at an enviable 8% per year, with only 42% debt to GDP ratio. So rather than go for more outright stimulus, it's expected that China will target new loan growth and its M2-money supply growth to around 14%.
Meanwhile, India and Australia have just lowered interest rates while other central banks are basically refusing to raise rates.
It means the world will keep turning, people will keep consuming and annual demand of raw materials is likely to remain elevated.
As for gold prices, let's cut right to the chase.
On Tuesday, Greek Prime Minister Lucas Papademos told Dow Jones Newswires that considerations were being made for a potential exit by Greece from the euro. He also warned that such an exit would be "catastrophic" for the country and that fallout across the entire Eurozone would be severe.
Concerns over what will happen to Greece and the Eurozone if Greece leaves have caused the euro to drop to $1.255, its lowest level against the dollar since July 2010.
These issues have led to a rising dollar as investors continue to move out of gold and into the dollar.
"Not surprisingly, Greece is the biggest single factor behind the move [out of gold and into dollars]," said Money Morning Chief Investment Strategist Keith Fitz-Gerald on May 11. "Traders are concerned that the nation will summarily go its own way, shatter the EU's bailout and potentially sink the euro itself."
Constant worries loom of a "Grexit" as European leaders met in an informal summit in Brussels today (Wednesday) to talk about the debt crisis and how best to spur growth in the struggling Eurozone.
The meeting comes a day after the Organization for Economic Cooperation and Development (OECD) issued a warning that the 17 countries that use the euro risk falling into a "severe recession."
"The crisis in the Eurozone remains the single biggest downside risk facing the global outlook," said Pier Carlo Padoan, chief economist for the OECD.
So just how low can gold prices go?
Paulson said government spending will trigger inflation, and investors should stock up on gold as protection.
"By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold," Paulson wrote in a letter at the end of 2011 obtained by Bloomberg News.
Hedge funds and money managers have increased their bets this year on higher gold prices.
Paulson's hedge fund, Paulson & Co., is the biggest investor in the SPDR Gold Trust ETF (NYSE: GLD) with a $2.9 billion stake. The fund is up 24% in the past year and more than 10% this year alone.
Paulson: It's Time to Buy Gold
With the U.S. Federal Reserve leaving interest rates near zero until 2014, more investors will buy gold as an inflation hedge.
"The appalling state of fiscal finances of most industrial nations does lead to concerns about the possibility of inflation," Mark O'Byrne, executive director of brokerage GoldCore Ltd., told Bloomberg. "Gold is a crucial diversification given the various risks out there."
The European debt crisis and its uncertain effects on the markets have also pushed investors into gold. China this week pledged to help the region resolve its fiscal issues by investing in Europe's bailout funds.