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The Eurozone Lights a Fire Under Gold and Silver

Just three months after passing a Euro stress test with flying colors, Belgium has agreed to buy the local consumer-lending unit of  Dexia  for 4 billion euros ($5.4 billion), and will guarantee 60% of a so-called bank to set up for Dexia’s troubled assets. The bailout was inevitable as European sovereign debt worries caused the bank’s short-term funding to vanish. Dexia’s agreement to nationalize its Belgian banking division and receive state guarantees paves the way for other eurozone governments to provide rescue packages to strengthen banking sectors.

“Dexia is not an isolated problem,” said Cor Kluis, a Netherlands-based analyst at Rabobank International. “The question for all investors in Europe is how politicians are going to handle this, and what they want to see is a coordinated and professional solution. That would be a good opportunity to restore calm.”  The markets cheered the move as investors realized that governments around the world will print as much money as necessary to handle the broken financial system. The Dow surged over 200 points as every Dow component climbed higher.  At the open, gold futures for December climbed more than $30 to reach $1670, while silver futures surged more than $1.00 to hit $32.

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“The three governments (Belgium, France, and Luxembourg) confirm they will take all the necessary measures to ensure the depositors’ and creditors’ safety,” according to an e-mailed statement from Belgian Prime Minister Yves Leterme’s office.  As other governments around the world use similar approaches, gold and silver will continue to rise. While governments consider the nominal value of deposits important, precious metal investors consider the relative value of their currency important.  German Chancellor Angela Merkel and French President Nicolas Sarkozy have both pledged to have a plan in place within a month to recapitalize European banks, replacing a 12-week-old rescue plan that has yet to be implemented. UK prime minister David Cameron is also urging European leaders to take a “big bazooka” approach to resolving the eurozone crisis.  A big bazooka could light another fire under gold and silver prices in the coming weeks and months as investors seek shelter from devaluing currencies.

As the eurozone shows progress towards stabilizing the euro, the US dollar is taking a hit. The dollar fell more than 1.5% in morning trading, which also gave precious metals a boost. With countries around the world preparing bailout packages, stimulus programs, and devaluing currencies, some are turning to the long-term safe haven status of gold. Recently, the Dutch asked their central bank, DNB, about their gold holdings.  They asked, “What is in your opinion on the function of the gold stock?”  The central bank replied, “DNB’s physical gold holdings function as the ultimate reserve and anchor of trust in times of financial crisis.  Further, gold is being held for diversification reasons.”  Individual investors concerned with the global debt crisis should consider precious metals for the same reason.

Going forward, debt ridden banks and countries will continue to give investors a reason to diversify into gold and silver. In the past 24 hours, in addition to Dexia, two more banks were nationalized.  Rueters reports, “Greece’s central bank said on Monday it activated a bank rescue fund to save Proton Bank,effectively nationalizing the small lender that is under investigation for possible violation of the country’s money-laundering laws.”  Bloomberg reports on nationalized bank number two, “Max Bank A/S became Denmark’s first insolvent lender to test a bank package designed to sidestep the country’s bail-in laws after the state was able to find a buyer and avert senior creditor losses.”  Investors must wonder, who is next to fall, and how high will it send gold and silver?

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