Shaky European Economy Bolsters Gold Buys

Gold prices jumped Tuesday on reports that Germany did not meet economic growth expectations despite producing 2.8% year-over-year expansion. The market was further troubled by the German and …

Gold prices jumped Tuesday on reports that Germany did not meet economic growth expectations despite producing 2.8% year-over-year expansion. The market was further troubled by the German and French governments’ latest announcement on how to handle the growing debt of the Eurozone. As the financial anchor of the European Union, Germany’s growing inability to cover losses incurred by its partners is causing increased fear of imminent economic instability in the region. The result is growing interest in commodities investments, particularly gold and silver. Gold surged $27 per ounce in a single day, while silver climbed $0.51 in the same period. For more on this continue reading the following article from The Street.

Gold prices skyrocketed Tuesday to a record close as weak second quarter growth numbers out of Germany and indecisive action from EU leaders spooked investors into the safe haven.

Gold for December delivery soared $27 to close at $1,785 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,789.80 and as low as $1,763.60 while the spot gold price was adding a more modest $14.20, according to Kitco’s gold index.

Silver prices settled up 51 cents at $39.81 an ounce while the U.S. dollar index was adding 0.05% at $73.91.

Gold prices were popping on a slew of disappointing growth numbers out of the Eurozone. The highlight came from the revelation that Germany’s economy grew only 0.1% in the second quarter, 2.8% year-over-year. The first quarter number was also revised down. Germany is the strongest Eurozone economy and its near contraction reading weighed on its neighbors — Eurozone growth slowed to 1.7% from 2.5% in the first quarter.

Gold extended its gains after German Chancellor Merkel and French President Sarkozy failed to deliver the goods at a joint press conference this afternoon. They both rejected a common eurobond and offered limp suggestions for helping the eurozone’s almost two-year old debt crisis.

Both leaders offered up a balanced budget rule that each member’s parliament would have to pass and a financial transaction tax. Neither did anything to help stocks. “They keep going into a room and coming out with another plan to save the euro,” says Chuck Butler, president of EverBank World Markets. This “weighs heavily on the euro and gives people the need to buy gold as a protection.”

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A flurry of inflation points also boosted gold Tuesday. India’s inflation reading for July came in hot at 9.22%, import prices in the U.S. rose more than expected by 0.3%, the World Bank said food prices soared 33% year over year, and prices in the U.K. rose to 4.4% in July.

Expectations are now that inflation in the U.K. could top 5% this year and with interest rates at 0.5%, real rates are a negative 4.5%. The longer real rates stay in the red, the better return investors get on gold as the currency loses value.

Fears over debt, inflation and currencies are pushing gold up towards the $1,800 mark, which was surpassed briefly last week, but some experts think these high levels aren’t sustainable. “Gold is overvalued in trading terms in the short term, as it has risen well above its moving averages,” argues Mark O’Byrne, executive director at Goldcore, a bullion dealer. “There is the risk of a correction from these levels.”

O’Byrne says, however, that gold could see a parabolic move in the near future as stagflation might rear its ugly head — double dip recession fears mixed with high inflation. “Increasingly, the question is not if we go parabolic rather it is when do we go parabolic?” O’Byrne points out that in the final phase of the bull market it 1979, gold popped 140% in a year. In 2011, gold prices have risen 26%.

Whether or not today’s rally is sustainable or just technical trading still remains to be seen. Jennifer Ropiak, vice president for NYSE Liffe US, says that “sometimes we get harsh moves because of short covering ahead of an event … but other times that harsh moves are because people don’t know what is going to happen.”

Ropiak says that there are very good reasons that traders and investors are looking for a safe haven from EU/US debt issues to low interest rates to portfolio diversification. “Gold has arrived as an asset class globally.” Ropiak says that most portfolio managers now say that 5%-10% of one’s portfolio should be in gold whereas 5-10 years ago that figure would have been unheard of.

“I think that the structure of the investment base has changed,” says Ropiak think that there are real reasons that people are in the gold market and it does seem that those issues will be with us for the foreseeable future.”

Recent 13F filings held no big surprises for gold. George Soros dumped more shares of the SPDR Gold Shares(GLD) but initiated small positions in 14 gold and silver mining stocks, among them Randgold Resources(GOLD), Newmont Mining(NEM) and Pan American Silver(PAAS).

John Paulson initiated a new position in Agnico-Eagle(AEM) while his largest gold stock positions remain with Gold Fields(GFI) and NovaGold(NG) at 24.7 million shares and 20.1 million shares, respectively. Paulson is still the largest holder of the GLD with 31.5 million shares.

JPMorgan(JPM) , on the flip side, was the biggest seller of the GLD and EFTS Physical Gold(SGOL)but bought 25 million shares of the iShares Gold Trust(IAU) , the cheapest gold ETF, to become its number one holder. The investment bank also has a small position in ETFS Physical Asian Gold(AGOL) , where the gold is stored in Singapore.

iShares Silver Trust(SLV) saw a lot of red across the board as prices took a nosedive in May with Bank of America(BAC), JPMorgan and Morgan Stanley(MS) selling a total of 10 million shares. Goldman Sachs(GS) sopped up some buying 3.3 million shares.

Gold mining stocks were turning lower. Kinross Gold(KGC) was flat at $16.39 while Yamana Gold(AUY) was down 0.72% at $15.17. Other gold stocks, Agnico-Eagle and Eldorado Gold(EGO)were trading lower at $63.70 and $19.61, respectively.

This article was republished with permission from The Street.

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