What “Joke” Euro Countries Have to Do with Gold

european debtIt’s comedy hour again in Europe.

This morning, we wake to news that, according to Eurostat, the European Community’s statistics office, Greece’s debt has been revised to 127% of GDP. Ireland is being pushed to accept a bailout from the European Economic Community. Some key government people in Italy quit this morning amid cries for Prime Minister Berlusconi to quit.

Given what is happening in Europe, is it any wonder the greenback rallied two percent on Friday?

No breaking news from Spain and Portugal today, but there is enough bad news coming out of Greece, Ireland and Italy to keep the euro under pressure. (As a side note: I would not be surprised to eventually see Germany leave the euro and head back to its own currency.)

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Looking at the securities issued by the governments of the troubled European countries, their bonds yield between 7.0% and 8.5%. In the U.S., a country that I believe in the long term is headed down the same path as some of the debt-ridden European countries, investors are buying U.S. government five-year bonds for a yield of only 1.46%.

In the same way I couldn’t understand why investors were jumping into NASDAQ stocks in late 1999, I can’t understand why people are willing to buy U.S. Treasuries today at such paltry returns, given the financial condition of the issuer. (We all know what happened to the NASDAQ 100. The index is still down 50% 10 years later.)

But cracks are starting to show in the lining of U.S. bonds. The yields on five-year U.S. Treasuries have been rising for two weeks straight now.

Going back the “joke” Euro countries…

How the wheel is working could not be clearer. The euro falls in value on poor economic news coming out of Europe, the U.S. dollar rallies, and gold goes down in price. This is what the “joke” European countries have to do with gold. And this exactly what happened on Friday. The euro got whacked, the U.S. dollar rallied two percent and gold bullion fell two percent in price.

At some point, it will not matter what the news is in Europe. The U.S. will have its own comedy running and its currency will weaken on its own without help from Europe. An ever-increasing money supply and no real effort to put the brakes on government spending can only lead to higher U.S. domestic interest rates and a weaker greenback.

As has been the case for the past 10 years, I see any weakness in the price of gold bullion as an opportunity to further accumulate the metal.

Michael’s Personal Notes:

As demand for General Motors Co.’s public offering is stronger than was expected (it looks like GM will be a public company again in about a week), we get news that foreigners will end up owning about 16% of GM once the shares start listing.

The U.S. and Canadian governments took a gamble with public money and funded GM through its bankruptcy to the tune of $50.0 billion. The government will get a good portion of that $50.0 billion back when GM is listed. And this year, GM will return to an annual profit after five consecutive years of losses.

As with many of this country’s great assets, foreigners are continuing to buy them up, as the balance of power moves from the west to the east. America stopped being the biggest auto market years ago. China is not only the world’s biggest market for cars today; it is also the fastest growing market.

The shift of power from the west to east continues…and there is really very little that can be done about it. All great empires eventually fall, and with the fall, their currencies erode. This is the zest of what we are seeing with the deteriorating condition of the greenback today.

Where the Market Stands, Where it’s Headed:

Investors are getting nervous. It’s been about a week that stocks have stopped rallying. Relax, I say. A week’s worth of trading does not make a new trend.

Up 14% since the end of August, the stock market was due for either a correction or some profit-taking, or maybe both. In reality, the market has not corrected on the downside by much yet, and this is what I’m really looking for. Will we get a meaningful correction in stock prices here or not? I have yet to see it.

Until proven otherwise, I see the bear market rally in stocks that started in March of 2009 intact.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008, long before anyone else