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Gold rush intensifies as France succumbs to debt contagion

|Includes: Sprott Physical Gold Trust (PHYS), PSLV
2011-AUG-11

French flag Concerns about a possible French sovereign debt downgrade and fears about the health of French banks led to a sell-off in financial stocks yesterday, with an index of European banks shares falling 6.7%, and the KBW index of US bank shares down 4.9%. Anymore signs that the sovereign debt crisis is spreading to France will dramatically increase the pressure on Jean-Claude Trichet and the European Central Bank to resort to money printing in an effort to ease the strain on the beleaguered eurozone.

In America, the Dow Jones Industrial Average lost 519.83 points (4.62%), with similar losses on the NASDAQ and S&P 500. The front-month Comex gold contract settled up $41.30 (2.4%) $1,781.30. Yesterday, CME Group – operators of the Comex – raised the margin requirements on gold contracts by 22%, which pulled the spot gold price down from an intra-day high of over $1,813. The front-month silver contract at last had a good day in the wake of gold’s gains, settling up $1.448 (3.78%) at $39.325 per troy ounce.

As the gold price heads higher and higher, there exists the potential for unprecedented volatility in the gold market – especially when considering that we are in uncharted territory as far as price action and technical support levels are concerned.

The latest Commitment of Traders Report for the Comex gold market shows commercial net-shorts up a whopping 42%, indicating that as of August 2 (the COT reporting date), the largest hedgers and short sellers at the Comex were confident that they could cap the recent gains in the gold price. However, as the King World News Blog highlights, this week’s price action will have proven incredibly discouraging – to put it mildly – for these shorts. The London trader quoted by KWN notes that Monday’s overnight price rises led to “margin calls on some serious players… The shorts have been mauled, and as I mentioned, in some cases to the point of ending careers.”

As the GotGold Report notes: “The very high levels of commercial short covering mean we have reached the point where we should expect higher to maybe even extreme volatility just ahead. It is perhaps the most dangerous of setups for traders on both sides of the contest, bull or bear… We cannot be surprised by violent moves of 3% to 5% or more in a day in either direction under the circumstances.”