The Daily Nugget: Euro Crisis Rears Its Head

As Nigel Farage MEP tweeted these words it seemed the eurozone was in self-destruct mode yesterday as the crisis reared its ugly head and reminded the world what it was capable of. Athens saw it most violent anti-austerity protests in over a year, Spain also grew violent as talk of secession in Catalonia and austerity measures made tensions fraught, France’s unemployment edged higher than seen since 1999, to over 3 million, whilst Moody’s downgraded its outlook on the single currency area from stable to negative.

The markets, in both Europe and the rest of the world, responded accordingly, demonstrating their lack of confidence in eurozone leaders to contain the crisis. The FTSE 100 finished at its lowest since the beginning of the month, oil fell to $109 a barrel and the Dow Jones was down by 0.33%. This morning the euro is at a two week low.

The gold price experienced a fairly hefty drop, reaching a two week low, as concerns for the stability of the eurozone, and its leaders’ ability to contain the crisis, spread and prompted dives for liquidity. When you are selling anything you can get your hands on for solvency reasons, liquid assets like gold get caught in the melee too.

Today, Spain is to announce a series of economic reforms and strict budget in order for the government to avoid having to go to begging to Brussels. Spain’s borrowing costs broke through the all-important psychological barrier of six per cent, rising 32 points to 6.06%. Prime Minister Rajoy had earlier told the WSJ that he would "100% ask for this bailout" should borrowing costs remain "too high for too long."

However, in the UK, we are, for the moment, remaining optimistic (or blind, depending on your opinion). Data released yesterday pointed to hopes of a recovery as the number of insolvencies decreased this quarter and retail sales have grown in the last month.

As Allister Heath warned in his column this morning, we must not get too smug or complacent here in the UK as we look over the fence to our neighbours on the crisis strewn continent. At the moment our economy appears strong and attractive to the outside as our central bank has the ability to buy all of the gilts issued by the Debt Management Office. However, we are, in fact more debt ridden than those going bust across the channel, "some of the eurozone countries that are nearly bankrupt could yet end up with budget deficits as a share of GDP that are lower than Britain’s."

This morning the yellow metal seems to be gaining some ground again, however analysts believe any gains made will be capped as further details of the eurozone crisis appear. The climb this morning however sees the best quarterly gain in more than two years. Further corrections are likely to be experienced in the coming weeks as the dollar gains strength and the eurozone continues to contain the debt crisis. The correction is not expected to be too dramatic however, with support being found between $1,700- $1,720 thanks to gold’s safe-haven status and very big Asian bids under the market providing strong resistance to price dips.

The view of gold as a safe-haven is spreading as the problems in Europe worsen, progress in the US economy remains poor (gold is expected to see a further boost at the end of the year when the US finds its toes on the edge of the "fiscal cliff") and the slowdown in industrial production has left China calling for further government stimulus. Meanwhile, gold mining production in South Africa is down by approximately 39% as many mines close in the face of worker strikes. South Africa currently produces 7% of the world’s total gold production, the fifth biggest gold producer in the world.

Things are looking the shiniest however for silver, which this morning has gained as much as 0.7 per cent to $34.20. Prices are set to rise 24 per cent this quarter, posting the biggest gain since the final three months of 2010. Bloomberg reports that hedge funds are most bullish on silver this year thanks to speculation that the white metal will outperform gold as it did during the Fed’s QE1 and QE2, by 53% and 24% respectively.

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