Tags: dollar | euro | eurozone | gold

A Golden Opportunity

Friday, 25 Mar 2011 07:50 AM

By Barry Elias

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Several months ago, I provided an analysis that suggested the price of gold may reach $4,000 per ounce in the next.

Recent events seem to support this hypothesis: weak U.S. housing demand, high European debt along and the weakened euro, and uncertain geopolitical forces in the Middle East and Northern Africa.

 In a recent blog, I suggested real estate prices may experience more downward pressure over the next six to 12 months.

"The new home sales data inspired some to think that we may not see the demise of QE2, and we are going to see money printing continue past its potential expiration at the end of June," said Mark Luschini, chief investment strategist of broker-dealer Janney Montgomery Scott with $53 billion assets under management.

The implication of increased U.S. dollar liquidity is a weakened U.S. dollar. 

Following Ireland and Greece, Portugal may be the next eurozone country to request financial assistance from the European Financial Stability Fund (EFSF), which was created more than one year ago to provide liquidity of 750 billion euros (approximately $1 trillion).

After suffering a political defeat of his financial austerity measures, Jose Socrates, prime minister of Portugal, offered his resignation. Five-year borrowing costs for Portugal have reached a new high of 8.05 percent, and the Irish benchmark bond yields have surpassed 10 percent for the first time in the history of the eurozone.

Referring to the collapse of the euro, investor Warren Buffett recently told CNBC, "I know some people think it's unthinkable . . . I don't think it's unthinkable."

The European financial crisis “greatly increases the chances that Portugal will need EU funds soon,” said a report by Brown Brothers Harriman. Barclays Capital suggests, "In the near term, we suspect bond yields will keep pushing higher, if only because uncertainty will prevail."

Adding to these financial concerns, uncertain geopolitical dynamics are gathering severe momentum in the Middle East and North Africa. Iraq, Afghanistan, Iran, Tunisia, Egypt, Libya, and Yemen are current examples of economic and political turmoil that can adversely impact economic and national security. Oil reserve management and terror network cells in the region provide the backdrop for unforeseen developments.

The implications of the aforementioned suggest a weakening of global fiat currencies (i.e., U.S. dollar, euro). This conclusion is predicated on an increase in the future supply of these currencies (money creation) to accommodate anticipated debt.

Developing global scenarios will enhance the need for a more stable, secure exchange mechanism, such as gold. As demand escalates, so too will its price.


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