PinnacleGold

News This Morning

The European Central Bank (ECB) cut rates 0.25 basis points to 1%, less than the 0.50% cut the markets were expecting. The ECB's new President Mario Draghi also fell short of expectations of a new bond purchase program that would've attempted to bring down the borrowing costs of troubled European nations. Europe is facing a double edged sword with their collapsing economies and rising inflation, and policy makers are unsuccessfully trying to satisfy both ends but are missing their mark on each.

What This Means for Markets and Gold

Without sufficient support from money printing authorities, European nations are more likely to suffer the inevitable defaults that await their creditors, which include core European banks. US hedge funds, recently exemplified by MF Global's failure have heavily invested in European sovereign debt, and US money market funds have a lot of exposure to European banks, both of which could face bank-like runs on their funds after much of their asset's values are reduced.

The notion of bank like-runs on money market funds has even been touted by former Federal Reserve Chairman Paul Volcker. This type of collapse will prompt European and US authorities to respond even stronger than the past, by effectively issuing more debt, guarantees and printing more money than ever before, both of which make precious metals highly favorable safe-havens and hedges.

US investors tied to mutual funds or hedge funds with exposure to Europe should consider adding gold to their portfolio as a means of protecting against the risk that these funds cannot make good on their promises. Many US investors do not realize the exposure they have, and the contagion from Europe that might ensue against their investments, and would gain the confidence against this risk by tying their investments to gold.

The ECB is tinkering on insolvency themselves, with their heavy exposure to weak European economy's national debt, and are losing the fight to inflation across Europe, despite their lack of aggressiveness in papering over the problems within Europe. Gold is performing particularly well when priced in euros as the European currency falls, but overtime the US dollar price of gold will evolve upwards as well since the Fed is in similar, but actually more dire circumstances.

Gold Will Have Very Strong Performance in 2012

We've already seen global central banks reduce their interest rates the last couple weeks and increase threats of money printing as they race to compete in an effort to devalue their currencies. They are working on the side of gold investors by ensuring that no currency or investment yielding fiat currency is safe. The Reserve Bank of Australia cut rates, the ECB cut rates, the Bank of Canada threatened to devalue their currency, the Swiss National Bank has committed to print unlimited money to avoid their currency rising, the Bank of Japan has committed trillion in yen to keep their currency down, and the Fed is looking to bailout Europe and increase their bailouts of US mortgages. Almost all other central banks are doing similar actions so there is no currency based investment around the world that is safe under these circumstances.

Policymakers cannot abuse gold like they abuse the paper assets and currencies they control, however. Investors that look to buy gold now can get in ahead of the inevitable third quantitative easing, a.ka. money printing program, by the Federal Reserve, and the big global bailout of Europe by major central banks and the IMF. Gold should achieve at least double digit growth this year as policy makers work to guarantee its ascent by their bailout efforts.