The Growing Flight To Safety

A growing movement is building momentum. As the European debt outlook worsens, the flight to safety grows. Even the beat up US dollar is rebounding. Most interesting is the direction of gold.

From Bloomberg:

Gold futures rose the most this month after Fitch Ratings cut Greece’s credit rating, boosting the appeal of the precious metal as a haven asset.

The euro tumbled as much as 1.2 percent against the dollar after Fitch said a “soft” restructuring of Greece’s debt by European Union policy makers would be considered a default. Europe’s financial crisis, accelerating inflation and fighting in Libya have helped extend gold’s rally into an 11th year, with prices reaching a record $1,577.40 an ounce on May 2.

“Gold is screaming higher,” said Matthew Zeman, a strategist at Kingsview Financial in Chicago. “People are buying gold as a hedge against the uncertainty in Europe. There’s a lot of focus again on the euro zone debt crisis.”

Gold futures for June delivery rose $16.50, or 1.1 percent, to settle at $1,508.90 at 1:49 p.m. on the Comex in New York, the biggest gain since April 29. The price, up 1 percent this week, has climbed 6.2 percent this year.

There’s a gravitation toward investments that are paperless,” said Adam Klopfenstein, a senior strategist at Lind-Waldock, a broker in Chicago. “Europe’s debt problems are back under the microscope.”

Gold also gained on signs that demand is increasing in China, where inflation is accelerating.

Italy Outlook Revised

Italy’s credit outlook was revised to negative from stable by Standard & Poor’s Ratings Services

A definition of flight to quality from Dogs of the Dow:

Flight to quality refers to investors moving investments into low-risk securities during times of economic or political uncertainty. Flight to quality can be caused by anything from a war to a change of fiscal policy to a recession. A flight to quality may include moving investments into blue chip stocks or out of low-rated bonds and into AA or AAA bonds. For many investors a flight to quality means switching investments into Treasury Bonds back by the U.S. government. In today's global economic environment a flight to quality often means transferring funds from a risky country to a safer country. A flight to quality often results in a decrease in the yield of government securities because of the sudden increase in demand. A flight to quality often results in a relative increase in the yield of riskier investments.


What is most interesting is the quick move up in gold bullion after a series of bear raids over the past week. Investors seem to gradually be catching on to the sovereign debt shell game being played in Europe. Greece is bankrupt for all intents and purposes, Portugal is approaching that same end, Spain and Italy are in jeopardy. The markets to date have been ignoring these fundamental problems, that default on debt is inevitable. I anticipate a rocky road for six months or longer and this shell game of hide the debt is played.
As central banks and individuals move to protect themselves, I expect gold to do remarkably well and strengthen even faster than the US dollar against the Euro.