HardAssetsInvestor

Written by Sumit Roy  |

July 24, 2012

Less Volatile Gold Poised To Benefit As Eurozone Crisis Reaches Critical Stage

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We offer our latest analysis on the precious metals market.

Volatility returned to financial markets over the past week, but ironically, the volatility in gold markets specifically has almost completely disappeared. The yellow metal has been locked in an extremely narrow range between $1560 and $1590 over the past several sessions.

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But that’s not necessarily a bad thing. Gold has held steadfast despite a continued rally in the U.S. dollar. The greenback notched a fresh two-year high this week amid renewed eurozone sovereign debt fears.

The crisis in the eurozone seems to finally be coming to a head. Spanish 10-year bond yields are at record highs above 7.5 percent, by all accounts, an unsustainable level.

Speculation is swirling that the country may now need a full bailout from the European Union, but an aid package of sufficient size would test the limits of the region’s bailout funds.

Moreover, it’s very plausible that the European Central Bank could re-enter the market for the first time since early this year to keep yields from spiraling even higher. Though it’s been reluctant to do so, the central bank could expand its balance sheet to purchase Spanish bonds, a move that would essentially be quantitative easing.

Regardless of what the ECB does, the likelihood of a third round of quantitative easing (QE3) from the Federal Reserve continues to grow as risks to the U.S. economy grow. The labor market and manufacturing sector are already weak; the eurozone crisis is merely another factor that could finally push the central bank to act.

That would, of course, be bullish for gold.

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