Contagion – frightening but good for gold

Growing contagion

Finance ministers are insisting on a 1.5bn firewall around Greece in order to prevent widespread contagion. These austerity measures have been deemed essential for fear that nonconformity will influence the amount of financial support from other EU states. Avoiding the need to speculate, it will be interesting if the same measures and demands are placed on Spain, Italy, Portugal, and Ireland to name a few.

Contagion for the most part is a dreadful prospect and would transmit negativity rippling

through the financial markets. In terms of being able to measure the force of contagion, one would look at depreciating equity indices, the falling value of the Euro and unemployment. Confidence is a major factor that underpins the stability of the market but this can also be measured in the rising price of gold. Since April 2010 gold has risen by almost 62%. Weakened confidence within financial markets and contagion thereof are the single largest contributor to rising gold demand. The fundamentals that support a rising trend for gold are often misconstrued. Its not that Gold has become more expensive; more accurately it takes more (depreciating) currency to buy the same amount of gold. Over the next few weeks, I will be looking at the following issues and how they affect the price of physical gold:

• Inflation
• Unemployment
• Devalued Currency
• Terrorism
• Interest rates