Gold Price Steady Near $1,415




The gold price stabilized near $1,415 Friday morning, showing a muted reaction to an 8.9 magnitude earthquake that rocked Japan earlier today. While the price of gold moved marginally higher, silver came under heavy selling pressure – falling 2% to $34.51 per ounce. Both precious metals have moved off their record highs posted in recent weeks on the back of a stronger U.S. dollar.

This morning’s modest strength in the gold price follows yesterday’s $17 retreat, in which the yellow metal fell victim to widespread liquidation on Wall Street. A bevy of bad news hit the markets yesterday, including Moody’s downgrade of Spain’s credit rating, escalating violence in the Middle East and North Africa, and weak employment data in the U.S. The Dow Jones Industrial Average (DJIA) plunged 228.33 points, or 1.9%, to 11,984.76, its largest single-day decline since August 11, 2010.

Although the gold price suffered its worst day since January 27 of this year, it rebounded $10 from its intra-day low on reports that police in Saudi Arabia fired on protesters. Oil jumped alongside the gold price following the Saudi news, spiking from $100.62 to above $104 per barrel. The violence came one day ahead of planned anti-government protests, termed the “Day of Rage” in which Saudi citizens intended to voice their displeasure with economic and political restrictions. While the most substantial turmoil thus far has occurred in nations with smaller economies – such as Libya, Egypt, and Bahrain – the vast oil reserves of Saudi Arabia make it a more significant threat to the global financial system.

Commenting on the multitude of recent global headwinds, Raoul Pal, author of The Global Macro Investor, contended that the excessive debt level is the key structural economic factor behind the challenges. Mr. Pal, who previously held positions at Goldman Sachs and hedge fund GLG Partners, noted that outstanding debt around the world has reached unprecedented levels. At 300% of total global debt to GDP, “that is simply and utterly mind-blowing and we are making next-to-zero progress in dealing with it.” While “governments around the world have tried their utmost to try and brush it under the carpet and hope it all goes away,” policymakers will eventually have to face the music of defaults or hyperinflation.

Pal went on to say that “The fiat currency system is at the root of this. Without anything of real value to back your currency except vast stores of the fiat debt-based currency of your major trading partners, currencies do not reflect true economic values.” He specifically pointed to export nations in Asia, which “can remain super-competitive for so long that they hole out entire economies, and weaker non-export countries can continue to buy the goods because their currencies remain unrealistically strong.”

“I am no great believer that a gold standard is the right answer but it would correct this issue almost overnight. Without doing something about this problem, the world remains incredibly at risk of a default by non-exporting, consumption-based economies, because that is the main support for the global economy. Sad, but true.”

While Pal did not go into more detail specifically on the gold price, his views suggest the global economy will continue to face significant challenges in the years ahead. Moreover, with the risk of sovereign defaults remaining high, in his opinion, faith in fiat currencies is likely to continue to decline. Historically, such an environment provides a robust recipe for higher gold prices.