News out of Europe about more forceful actions to alleviate the debt issues, including larger write-downs on Greek debt and moves to push banks to strengthen their capital, has caused the dollar to retreat and gold to rally.
Many would think that this is a stabilization of the banking system and as a result, we would see the fear trade come out of gold.
However, we must look at how these bailouts are paid for.
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It’s not like these governments have this money sitting in a big pile waiting to use it. Most of this money has to be borrowed or printed. If you look back to the 2008 financial crisis in the United States, the Federal Reserve expanded its balance sheet (with printed money) by more than $1.5 trillion to buy MBS securities from banks.
The TARP money, and then the stimulus, was borrowed by the U.S. government. Therefore, the similar fund being set up by the European Central bank and any potential banking bailout will have to use borrowed money or printed money.
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When you print or borrow money, you debase the value of your currency which tends to create inflation. The protection against inflation is gold!
Therefore, the larger the bailout is in Europe, the more money that will be printed. That will be all the better for gold.
In addition, the United States and United Kingdom are printing money to support their huge deficits.
This means that roughly 50 percent of the global economy (which is what the eurozone and the United States make up) is printing massive amounts of money to pay for their overspending and debt problems.
The future looks very bright for gold, anyway you look at it.
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