Daily Gold Update

Source: Dr. Bill Musgrave, American Gold Exchange

Austin— Gold slid 1.3% as investors flocked into U.S. dollars and Treasurys over deepening anxiety about the solvency of Spanish banks. At the same time, U.S. and global equities rose on expectations of additional stimulus from the government of China, which indicated over the weekend that it will provide some two trillion yuan ($315 billion) in response to the global financial crisis. After Egan-Jones downgraded Spain�s credit rating today to BB- from B, the euro fell swiftly under $1.25 for the first time since July 2010 and the dollar rose to a 22-month high. For now, the dollar is the prime beneficiary of safe-haven flows out of the euro. A rising dollar pressures gold by making it more expensive in other currencies. Silver fell harder than gold, dropping 2.1%. Platinum and palladium rose 0.1% and 2.4%, however, on the belief that Chinese stimulus will increase automobile production.

At the close: August gold fell $20.20 to $1,551; July silver dropped 60 cents to $27.79; July platinum picked up $1.60 to $1,428.10; and August palladium added $14.20 to $606.05 an ounce.

With a Greek default and departure from the euro factored into the market, Spain is widely viewed as the last line of defense to preserve the common currency. Spanish economic reports, however, are increasingly grim. Spanish retail sales fell last month by nearly 10%, its 22nd straight monthly decline. Contraction of the Spanish economy is projected to accelerate this year and unemployment, already Europe's highest, to increase. Spain has already dedicated nearly 24 billion euros to recapitalize Bankia, its third-largest bank, and Moody's downgraded 16 Spanish banks recently, driving the cost of insuring Spanish debt to all-time highs. Now with the Egan-Jones downgrade, things just don�t look good.

It's increasingly clear that Spain will have to tap outside resources to stay afloat, and the ECB is the obvious source. More easing is therefore likely in the eurozone, according to Robert Sinche, head of currency strategy and the Royal Bank of Scotland, not simply for Spain but because of falling manufacturing and rising unemployment throughout the eurozone, even in Germany. India just announced more easing to boost its flagging economy, and monetary stimulus has been promised in China. Given that a strong dollar undermines the U.S. recovery by hurting exports and manufacturing, can the Fed be far behind? Additional global stimulus, because it weakens currencies and increases long-term inflation risk, is very bullish for gold. In the heat of the current financial crisis, investors are pouring into the dollar instead of gold, but that could quickly change as monetary policies loosen again, especially if the Fed joins the party.