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The Gold Price Stutters Around $1600

The gold price today continues to linger around $1,600 closing on Friday at $1,599 or £1,017 per ounce.

On Friday the gold price surged higher after Eurozone officials agreed to ease restrictions on emergency loans to European banks. The spot price grew as much as $44.37, or 2.9%, to $1,601.27 per ounce in morning trading.

The Eurozone continues to set the tone for the gold price and markets continue to follow the news.

Re-setting the economy

Recently something drew my mind to the cycles of economies.

It was late on a Friday, Frustratingly I looked hard at my computer screen. Somewhat dumbfounded by its ability to freeze and become completely unresponsive. With a rage building up inside me and after futile attempts to see what was wrong I called for IT to come. In stepped the resident IT guru. Took one look, placed his finger on the large button and pushed hard. We watched as the computer screen went blank. We made idle chat for the magic two minutes that he assured me we needed to wait and then he pressed the button again and the screen kicked back into life. All the troubles gone…

The IT man turned to me and said "Have they tried turning the economy off then on again?"

In fact the economy often has booms and busts. It's a continual cycle. Nicolai Kondratieff and Ralph Nelson Elliott suggested that an economic cycle of debt build-up and repudiation repeats every 50-60 years. Below is the Kondratieff Wave…Article text goes here..

The Kondratieff Wave.


It is always good to stand back and look at the big picture. Will the stock markets bounce back and hit new heights? In my opinion it's more likely than not. When then? Only the market can dictate that.

Britain falls into a double dip recession

On Thursday it was confirmed Britain was in a double dip recession. Official statistics showed output dropped 0.3 per cent in the first quarter of the year, household spending fell 0.1 per cent and real incomes shrank 0.9 per cent in the first quarter.

The Office for National Statistics also revised its fourth-quarter growth estimate from 0.3 per cent to a 0.4 per cent contraction.

The Eurozone is stuck in a contracting economy

In another closely watched survey, the Purchasing Manager's Index (PMI) for the Eurozone showed that for May and June the region was shrinking at its fastest pace for three years.

The "composite" Eurozone purchasing managers' index, was 46 in June and May. Less than 50 indicates a contraction in activity.

The Financial Times notes "The weak readings increase the pressure on policy makers for fresh measures to boost growth - and the chances of the European Central Bank cutting interest rates at its meeting on July 5. Benoît Cœuré, ECB executive board member, told the Financial Times this week that a cut had been "discussed at the last governing council meeting and I would expect the next council to discuss it again"".

The chief economist at Markit, who produces the report, suggests that the results indicate further problems ahead. He said the report showed the markets were "preparing for conditions to worsen in the coming months, with the darker outlook often attributed to uncertainty caused by the region's ongoing economic and political crisis".

The Eurozone crisis has complicated the normal bust then boom cycle. Paving the way for a slow, drawn out stagnation.

The gold price

It is into these headwinds that the gold price holds steady. Gold is a play against inflation. It's also a play against currencies. However in view of the precarious Eurozone currency, and inflationary measures taken by world governments the gold price is not setting new highs.

One explanation is that the economy is contracting. GDP contracts, real income contracts, investors become more cautious, cash becomes more valuable as its the quickest way to react. Only QE can reset that and boost the supply of credit which would flow into commodities and assets. Its not the long term fix the markets need but it's certainly the only fix governments know. And with the British dropping big hints it will pursue further rounds soon, as well as the US and the Eurozone determining whether to inflate the money supply to prop up housing markets and steady banks the gold price still has the potential to grow.

There may be no easy way to reset the economy but there is a way governments can stimulate them. Inflate away!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.