Daily Gold Update

Source: Dr. Bill Musgrave, American Gold Exchange

Austin— Gold dropped another 1.5% and the dollar gained for an eleventh session as last week's Greece-inspired sell-off continued. ">Gold ticked up in Hong Kong, closing above $1,578 as additional monetary easing in China combined with stronger physical demand for jewelry and investment in Asia. But risk-off sentiment in Europe and the U.S., driven by Greece's inability to form a coalition government and fears of a possible euro collapse, led to plunging equities and a higher dollar. For now, gold is getting caught in the downdraft of falling commodities and flights to safety in Treasuries. A rising dollar makes gold and other commodities relatively more expensive to holders of other currencies, driving down demand and prices. The other precious metals followed suit with silver falling 1.9%, platinum 2%, and palladium 1.4%

At the close: June gold slid $23 to $1,561; July silver dropped 54 cents to $28.35; July platinum tumbled $28.80 to $1,442.60; and June palladium fell $8.55 to $594.85 an ounce.

Greece's political and financial turmoil is becoming so untenable that ECB governors are now openly discussing the possibility of Greece leaving the monetary union. What would happen if Greece drops the euro, or vice versa? According to Willem Buiter, chief economist for Citigroup, the consequences would be a financial collapse and depression in Greece, along with a spreading banking crisis in the remaining euro nations and the Europe Union. Faith in the euro would evaporate because if Greece can break the treaty, why not Spain, Portugal, Ireland, or Italy? The currency would see a substantial drop in value.

The last thing the U.S economy needs is a seriously cheaper euro. Exports have been one of the few bright spots in the U.S. recovery. According to the Wall Street Journal, "Despite Europe's debt woes, U.S. exports to the continent have been recovering since the 2008 financial crisis. Overall exports have been a critical driver of the U.S. recovery, far outpacing their growth in most recoveries since World War II. One key reason: the U.S. dollar has remained relatively weak against the euro, at or above $1.30 for most of the past three years."

If the dollar becomes much more expensive versus the euro, U.S. exports will have a much harder time competing with European goods and the limping U.S. recovery will be further hobbled. As the Financial Times points out, "To the extent that the euro does drop, pressure will increase on the Fed to consider another round of quantitative easing to keep the dollar relatively depressed." Central banks on both sides of the Atlantic would be likely to turn on the printing presses. And that would be very bullish for higher gold prices.