Gold Underpinned by Safe-Haven Bid

by Peter A. Grant

March 14, a.m.
(from USAGOLD.com) --

Gold remains generally well bid amid ongoing concerns about the situation in Japan, continued geopolitical uncertainty in North Africa and the Middle East and a weak dollar. All are seen as limiting factors on the downside for gold. The dollar on the other hand is languishing near the lows for the year. In light of the events in Japan, it has become increasingly clear that the greenback has lost its 'go-to' status as a safe-haven currency, even during black swan events. The Swiss franc, euro and of course gold are helping to fill the safe-haven void. Even the yen is holding up comparatively well, given the circumstances.

The Nikkei lost more than 6% in the first trading day after the earthquakes and tsunamis in Japan, despite massive liquidity measures on the part of the Bank of Japan. The BoJ pumped a record ¥15 trillion ($183.17 bln) into the economy today in an effort to address liquidity concerns. The central bank also pledged an additional ¥5 trillion in asset purchases in the hope of stabilizing markets. While the market may be inclined to provide some grace period for Japan, given the level of destruction there, the long-term implications for an economy already saddled with huge debt and demographic problems are already being discussed.

While much focus has shifted to events in Japan, the situation in North Africa and the Middle East remains quite tense as well. Forces opposed to Libyan strongman Muammar Gaddafi reported more airstrikes against their positions today as the West continues to contemplate implementation of a no-fly zone. Meanwhile, more than 1,000 Saudi Arabian troops have reportedly entered Bahrain in an effort to quell escalating protests by a Shi'ite majority against the Sunni regime. The planned "day of rage" in Saudi Arabia was quashed last week by a massive show of force, but the pressure remains and several smaller scale protests have broken out.

Despite long odds, EU ministers hammered out a plan for a permanent rescue and stability mechanism over the weekend. The plan will be submitted for endorsement at the eurozone summit scheduled for 24-Mar, but news of the pact saw spreads narrow and the single currency rise. The proposal calls for the lending capacity of the bailout mechanism to more than double to €500 bln and would allow direct purchases of sovereign debt from troubled member states. The concession provided to the more fiscally responsible European nations -- that will be obliged to pay for this -- is that budget constraints will have to be written into law.

The term for Greece to payback its bailout will be more than doubled to 7½-years and their interest rate reduced by 100bps. Ireland on the other hand will apparently not get any relief as they steadfastly refuse to raise their corporate tax rate. Outgoing Bundesbank President Axel Weber seemed to suggest that the proposed EU "competitiveness pact" isn't tough enough. However, it seems that Chancellor Angela Merkel is simply trying to put the eurozone debt crisis behind her in advance of important regional elections, even though further concessions on the part of Germany to rescue ailing member states lacks the support of German taxpayers...and voters. Nonetheless, the weekend compromise has helped solidify the euro as one of the new safe-haven currencies.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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