Gold Recovers as Markets Weigh Volcano and Sovereign Debt Default 'Black Swan' Risk

Gold Recovers as Markets Weigh Volcano and Sovereign Debt Default 'Black Swan' Risk

Gold went up to $1,137/oz before dipping slightly in New York yesterday but it then recovered ending with a loss of 0.06%. It has risen from $1,135/oz to $1,142/oz in Asian and early European trading this morning. Gold is currently trading at $1,142/oz and in euro and GBP terms, gold is trading at €847/oz and £742/oz respectively. Gold has recovered much of the losses from Friday and gold's fall was as much to do with dollar strength and oil weakness last week as it was to do with the Goldman allegations. Indeed gold has already recovered much of the losses from Friday especially in euro and sterling terms.

This morning, Greece's borrowing costs more than doubled at an auction of three-month bills amid concern that the nation will default unless it taps a bailout package brokered by the European Union. With the real risk of Greece becoming the first major industrial nation to default on its debt, euro gold looks set to overcome its recent (nominal) record high of €857 per ounce. The mini herd panic that markets succumbed to last Friday appears to have abated. The Goldman news if anything is bullish for precious metals as it may lead investors to evaluate overweight allocations to financials and to equities in general. Astute long term buyers and bargain hunters have used the "Goldman panic" to buy gold on the dip.

Inflation concerns have not been eased by the latest inflation data from the UK (see Newsbelow) and Germany. Producer prices in Germany rose 0.7 percent in March, compared with no change in February, the Bundesbank said today. Bloomberg reports that Germany accounted for 134 metric tons of retail investment demand last year, more than all of North America, according to London-based research company GFMS Ltd. The total doesn't include fund purchases, jewelry or bar hoarding. Given the uncertainty in the eurozone, German investment demand looks set to remain high for the foreseeable future especially give the Germans historical memory of currency crises and hyperinflation.

The Icelandic volcano is a classic 'Black Swan' and should it continue to erupt or should the larger volcano in Iceland erupt as well, it may have serious repercussions for the eurozone economy and indeed our integrated global economy. Sovereign states already greatly weakened by the financial and economic crisis, are not in a position to cope with having to bail out national airlines and other sectors that are being badly affected by the travel chaos gripping Europe. As ever, the rare and unexpected 'Black Swan' is an important reason to own financial insurance by having an allocation to gold.

THe “black swan” event in my third novel is the New Madrid Quake wrecking everything between St. Louis, Nashville and Little Rock.

http://www.enemiesforeignanddomestic.com/FESP.htm

Here is the “black swan” explanation part of the extended excerpt linked above.

“Maybe America died a long time ago, and it just took us this long to realize it.” Doug shouldered the reassembled rifle, aimed it at the ceiling of the cave, and sighted along its barrel.

“That might be right. Maybe you could write a book about it some day. You’ve got a lot of ideas, a lot of insight for a young man.”

“I’ve thought about it.” He took the rifle, and propped it against a crate behind him, in easy reach. “Did you ever hear of a book called ‘The Black Swan’?”

“No, never.”

“You ever read about chaos theory?”

“Sure, a little.”

“It’s related to that. Risk, randomness…it’s sort of where mathematics meets philosophy. Anyway, a black swan event is something nobody thinks can be possible, like a black swan in nature. All swans are white, right? That was a certified known scientific fact forever—until they found black swans in Australia. You can’t even imagine a black swan, until it hits you between the eyes. Planes taking down buildings on 9-11, that was a black swan. The constitutional convention coming out of nowhere—that was a black swan. The global financial collapse, that was one too. After they happen, everybody has an explanation, but never before. Hindsight is twenty-twenty, but foresight is blind. The twin earthquakes sure as hell were black swans. All the experts said that a big Midwest earthquake should only happen about every five hundred years. They said that like it meant we had another three hundred years to go, counting from the last big New Madrid quake. Like earthquakes followed schedules. So much for experts!

“Hell,” said Doug, warming to his subject, “We got attacked by a whole damn flock of black swans, and the experts didn’t see a single one of them coming. Nobody believed any of this could happen. But it did! When it comes to predicting these off the bell curve events, the experts were all wrong, wrong, wrong. Speaking of bell curves, some people call these black swan things ‘fat tails.’ That means a big fat bulge out on the skinny edge of the bell curve, where things should be astronomically rare. Fat tail events happen all the time out in the real world, but the experts can never see them before they hit.”

“Like ‘five hundred year floods’ that happen twenty years apart,” said Carson.

“Exactly. I read that Black Swan book back at the University of Maryland for a course I was taking. I’d love to read it again some day. When I read it in college, it seemed kind of far out. Not any more. I’m a big believer in black swans now. What you can’t see can kill you. What you can’t even imagine can kill you—or wreck your country. You think that just because your country has been chugging along pretty well for two hundred years, it’ll keep on going forever, nice and easy. Like some kind of American birthright, or natural law. But black swans are out there—even if you can’t see them, or predict them. And they can change everything.”

“Doug, you have got to write a book about this.”

“Maybe I will. But who’s going to read it?”

“I would.”

“Thanks. I’ll start tonight. Or today, or whatever time it is.”

Carson checked his watch. “It’s half past noon.”

“It never changes in here. It’s easy to get disoriented, and lose track of time.”

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