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Will Gold Hit $3,000 on Euro Collapse?

5 May 2010 161 views No CommentEmail This Post Email This Post

One analyst seems to think it might happen. David Rosenberg, analyst at Gluskin Sheff, says the breakdown of the euro could well drive the price of gold to $3,000. Today the euro dropped to $1.28, and it is down over 12% from its high of $1.51 against the US dollar.

In a note to investors, Rosenberg said:

The case for gold heading to $3,000 an ounce is getting stronger by the day. The euro has already broken below 1.30 to the U.S. dollar and there is plenty of room for additional decline going forward. It’s only at a one-year low — wait until it moves to a decade low.

The European Central Bank, Rosenberg notes, has been forced to water down its charter as it permits sub-investment grade Greek bonds as collateral.

Sadly, the central bank is not a remake of the Bundesbank and the Euro is less of a “hard currency” than its architects could have ever envisaged a decade ago. Now there is talk that the ECB is contemplating a quantitative easing plan.

Contagion risks from the Greek financial crisis loom, and there are simply not enough trees on the planet that can provide enough paper currency to backstop countries like Portugal and Spain. And let’s not forget about Italy — its public finances are less dire but still fragile.

This makes the current environment a great time to buy gold. Gold makes a good hedge during times of financial crisis and currency debasement.

Gold prices closed at $1,175.30 today, up $3.40 from yesterday’s price. Credit rating agency Moody’s put Portugal’s credit rating on review for a possible downgrade, pointing to the “recent deterioration of Portugal’s public finances as well as the economy’s long-term growth challenges.”

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