Will a Euro breakup boost gold and silver prices?
Greek politicians are struggling to form a new government. Concerns are increasing that Greece will drop the euro.
Last week we spoke about the upcoming election in France, where we saw a changing of the regime over the weekend. France's new socialist leader Francois Hollande is much more supportive of the European Central Bank intervening to boost the European economy by taxing the rich and industry. This is at odds with Angela Merkel of Germany, who faces a possible ousting herself as it is clear that austerity is not popular. At one point there was a strong partnership between France and Germany, but voters are choosing socialist means of taxing the rich rather than boosting industry like the Chinese and Russians. This may be destabilizing, causing investors to return to gold and silver as a hedge against a European currency on the brink of a possible crash.
This means we may see a new round of euro uncertainty this summer, which could lead to the next leg higher in precious metals. While the Europeans may be selling their gold to raise capital, the Chinese are important gold at a record pace and are becoming the largest consumer. China's imports of gold have skyrocketed more than sixfold in the first quarter. China is realizing the need to increase its reserves and is on the record that it is on the search for natural resources worldwide.
Operation Twist is set to expire in June. If we don't hear word of a QE3 or additional stimulus, then we can see a downward move in U.S equities. We saw this in the summer of 2011 as QE2 expired and in the summer of 2010 as QE1 expired. These stimulative moves boost stocks higher, then when the programs end we see liquidity traps. We need to be careful of a repeat of such a move in overbought equities and look for a rotation into the precious metals, which are continuing to make higher highs and in a long-term uptrend while the euro and dollar remain in downtrends. For instance, the dollar is still significantly lower than it was in the summer of 2010, before this Eurozone crisis intensified.
Support for gold is at $1,600/ounce (oz) and $27.50/oz for silver. We may see an initial correction in U.S. dollar terms, but gold and silver are near key support levels, oversold and possibly just about to takeoff. We are reaching extremely negative sentiment indicators indicating a bottom both in precious metals and the extremely undervalued miners. When indicators reach this level a bottom reversal may occur sooner rather than later.