Gold price set to explode as Europe dithers

Brendan Ryan | Mon, 12 Dec 2011 11:27

[miningmx.com] --THE gold price is likely to explode as a result of the sovereign debt crisis in Europe, combined with the impact of the negative real interest rates ruling in many major economies. Those are the views of gold experts Martin Murenbeeld - chief economist at DundeeWealth Economics - and Frank Holmes, chief investment officer at US Global Investors. Both assessments run counter to the latest movements in the gold price, which has fallen below $1,700/oz in response to developments in Europe - in particular the stance of European Central Bank (ECB) president Mario Draghi. In his latest weekly Gold Monitor, Murenbeeld indicated he had lost patience with developments in the Eurozone: "I continue to think there will be an upward explosion in the gold price at some point in time, but just exactly when is difficult to judge. "Euro-fatique - I think I have reached it. They don’t get it; they can't get it; they will not get it! Accordingly, I think the euro and the EMU (European Monetary Union) in their present form are doomed. “After observing the last two days of press conferences and summits in Europe and listing to Draghi on the ECB webcast yesterday, I am fully convinced there is no political understanding of the fundamental problems besetting the Eurozone, nor of the steps required to solve those problems. "Ergo, the market will solve those problems; private investors will avoid Eurozone debt and leave it for the IMF and other 'useful idiots' in the official sector to buy the stuff. "At some point they too will balk and the breakup of the Eurozone will commence." Murenbeeld’s assessment of the final statement released by the European Council was that, "if it wasn’t for the summary on the front page I wouldn't actually know what it said..this is not the first time I have thought Bernie Madoff was alive and well, living in Europe." "It's complicated I guess, too complicated for economists." In his latest investor alert posted on the US Global Investors website, Holmes asked the rhetorical question "what do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks?" The answer, according to Holmes, is "an exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000/oz. "Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade," he said. Holmes pointed out that the majority of nations in the G-7 (group of seven major industrialized nations) and E-7 (group of seven major emerging economies) have negative real interest rates.

A negative real interest rate occurs when a nation's inflation rate is greater than its current interest rate. "Across the developed G-7 countries, British citizens are the worse off with real interest rates in the UK sitting at a negative 4.5%," Holmes said. "US investors aren't doing much better with rates at negative 3.25% and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero. “Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping's grandest economic power houses, China and India, have negative real interest rates sitting around negative 2%." Holmes pointed out that, despite the fact real interest rates look to remain in the red for the foreseeable future, "many of these same countries are printing record amounts of 'green' with accommodative monetary policies." "When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different. "The beneficiary of this type of event has historically been gold," he said. He noted the latest predictions were that central banks would purchase between 475 tonnes and 500 tonnes of gold during 2011. "This amount of capital flowing into gold has the potential to push prices up a level in 2012."