Pain in Spain rattles investors

The gold price staged a decent rally late yesterday, heading from an intraday low around $1,630 at 11EDT to over $1,660 over the next hour and a half. There was no obvious news catalyst for this move – no dovish Bernanke comments – apart from growing fears about Spain and Italy, something that prompted losses in equities and commodities. Aside from the gains in gold, the dollar rose slightly and US Treasury yields fell – a sure sign of growing market pessimism.

Though the silver price also rallied with gold, it failed to recover above its high for the day above $31.85 – unsurprising perhaps in light of the pessimistic talk about the eurozone. Silver usually does best when the dollar is weakening and inflation expectations are rising.

Spanish 10-year yields are now at a 19-week high, with comparable Italian bond yields at an eight-week high. Spanish stocks were down around 5%, and are just 10% above the low seen in March 2009. Bargains perhaps for those with strong stomachs who are prepared to take Warren Buffett’s advice about “buying when others are fearful”, especially given the fact that the European Central Bank will surely be forced into conducting another LTRO – or some other attempt to weaken the euro – in light of Spain’s difficulties. When this happens, in all likelihood Spanish stocks and bond prices will rise. This will weaken the euro against gold, silver and other hard assets, and push eurozone inflation higher. But that’s the deal the ECB will have to accept if they want to preserve the eurozone.

At King World News, James Turk also points out that the huge size of government as a percentage of eurozone GDP is placing a crushing burden on the shrinking private sector. Another reason why the ECB will be forced into ever-greater debt monetisation efforts.


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