HardAssetsInvestor

Written by Sumit Roy  |

December 06, 2011

Precious Metals Monitor: Gold Chart Pattern Looks Strikingly Similar To 2006

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Gold’s price action in 2006 offers a road map for where prices could go from here.

News flow related to the eurozone sovereign debt crisis remained fast-paced over the past week, but surprisingly, almost all of it was positive. In turn, gold lost a bit of steam as an attempted rally petered out.

It all began late last week when European Central Bank President Mario Draghi said that the central bank could take more action to alleviate the sovereign debt crisis, though only after members achieve closer integration with a "commonly shared fiscal compact."

Italian and Spanish interest rates, which are at the heart of the debt crisis, immediately plunged on the news. Rumors that the European Central Bank may lend €200 billion ($270 billion) to the International Monetary Fund so it can then provide support to struggling eurozone nations added fuel to the plunge in rates.

Then early this week, German Chancellor Merkel and French President Sarkozy announced they had agreed to a framework for closer eurozone fiscal integration that will be presented at a summit of EU leaders on Friday. To keep the region's finances in order, the plan calls for automatic sanctions on member countries whose deficits exceed 3 percent of gross domestic product.

The two leaders must now convince fellow members to approve an amendment to the European Union treaty in order to incorporate their new ideas. Thereafter, the European Central Bank may step in with more aggressive action as suggested by Central Bank President Draghi.

Though much hinges on what happens on Friday’s summit, sovereign debt markets wasted no time in pricing in an extremely favorable outcome. Italian and Spanish 10-year bond yields were last trading near 5.84 percent and 5.11 percent. Those yields are now significantly below their recent respective euro-era records of 7.47 percent and 6.78 percent.

Cognizant that the stakes are so high, it is anticipated that Germany and France will put intense pressure on fellow members to approve their plan for greater fiscal integration, paving the way for the ECB to take on a greater role in the crisis.

Ahead of the summit on Thursday, the ECB is expected to cut rates by 25 basis points to 1 percent — matching the record low of the 2009 financial crisis. Markets will closely watch for any comments on what additional action the central bank may take, though it may keep mum until after Friday’s summit.

All things considered, the week has been a very positive one for Europe, and by extension, the global economy. Though there is still a bit of uncertainty with regard to how the events play out later this week, investors are betting that the outcome will be favorable.