Will Europe Provide the Final Catalyst for Gold and Silver?

Published June 18, 2012

| Wall St. Cheat Sheet

Over the weekend, the worst case short-term scenario for Greece was avoided. In one of the most closely watched elections on Wall Street, the pro-bailout New Democracy party defeated the Syriza party, which had threatened to walk out on the bailout agreement. The election results provided a relief rally, but is was short lived. As seen with the previous Spain bailout, the markets are still waiting on more definitive central bank action as the next catalyst.

Asian equities rallied soon after the election results. The Japan Nikkei and Hong Kong Hang Seng indices both hit one-month highs. However, American equities and commodities traded lower as the focus shifted to bonds. Spain’s 10-year government bond yield jumped above 7 percent and hit as high as 7.285 on Monday, representing a new euro-era all-time high. “In the past, it seems like that as soon as one issue has been resolved or rather, as soon as there is less uncertainty regarding one main issue affecting markets, attention quickly turns to next one, similar to the situation after the Spanish banking rescue last week where focus shifted onto Italy and Italian banks, explained ETX Capital senior trader Markus Huber.

Don’t Miss: Patience Pays with Gold and Silver

Despite trading as low as $1,606.9 per ounce in early trading, gold managed to hold support and pare its losses. Silver also showed weakness as it declined to $28.24, but rebounded to $28.65. As the charts below show, both precious metals are currently in a holding pattern. Gold has support at $1,550-$1,600, while silver looks to be an absolute bargain on dips towards $26.

Although some may expect gold to underperform the market with no official easing being announced by the European Central Bank or the Federal Reserve in recent days, gold traded higher every day last week to gain more than 2 percent. In fact, gold and silver both appear to be in the process of making bottoms that will lead to higher prices in the second-half of the year as more dominoes fall in the eurozone. The latest example comes from Zero Hedge via Market News. Spanish banks may need another 150 billion euros for provisions on bad loans, according to El Confidencial on Monday. The estimate comes from an independent audit due to be released later this week.

“The provisioning estimates contained in the anxiously awaited report, commissioned by the Spanish government and conducted by private consultants Oliver Wyman y Roland Berger, will be higher than previously estimated because their calculations now include large provision figures for the retail mortgage sector. The 150 billion euros in required loan loss reserves is not to be compared directly with the 100 billion euros of recapitalization aid offered to Spain earlier this month by its eurozone partners,” Market News reported. The news is just another reinforcement that the insolvency problems seen in regions such as the eurozone are nowhere close to being solved.

A global central bank effort that has been rumored to take place if needed in response to the eurozone problems will boost gold and silver, but will hardly provide the last catalyst for the precious metals. The eurozone is the first focus of the insolvency crisis, not the last. The United Kingdom and Japan have headline worthy problems of their own, while the United States is quickly approaching a fiscal cliff and another debt ceiling showdown later this year. The coming months and years stand to be a very interesting time for gold and silver.

Investor Insight: Are Gold Bugs Pessimistic or Realistic?

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Disclosure: Long EXK, AG, HL, PHYS

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