Gold Is Consolidating. Watch This Signal for an Explosion to the Upside

Gold Is Consolidating. Watch This Signal for an Explosion to the Upside by  for Money and Markets

Earlier today the leadership of the European Union held yet another meeting to discuss the future of EU fiscal policy. And after another three hours of everyone restating their well-worn positions, no progress was made, publicly at least.

The issue for Europe is the need to create a permanent fiscal union, centered around an independent European Central Bank becoming the sole issuer of new euros, just like any other normal (sic) central bank.

In one corner are the so-called “Frugal Four” — Austria, Denmark, Netherlands and Sweden — who are adamantly opposed to commingling all the sovereign debt of the eurozone. In the other is, frankly, everyone else, who all want the EU to backstop and deal with their massive debt overhangs.

In the middle sits Germany with Chancellor Angela Merkel, who plays at being one of the Frugal countries for domestic consumption while promoting backdoor plans to push the EU toward a full fiscal union.

Merkel will be in control of the EU budget talks come July 1 as Germany takes on the rotating Presidency of the European Commission. That’s what these failed meetings between leaderships are all about — staking out positions for those future fights.

Earlier this week, the ECB conducted $1.3 trillion in TLTRO loan auctions at the ludicrous yield of -1% and -0.5%, which European banks scooped up to gain liquidity and a positive yield spread versus U.S. Treasurys and other higher-yielding sovereign debt.

The size of this auction was likely a reaction to the FOMC’s refusal to “go negative” last week with interest rates. The Fed, in effect, blew up the long euro/short dollar trade that has been in place the past few weeks. A trade that emerged, thanks to the Merkel/Macron proposal aid, grants for troubled eurozone members, the political and social unrest in the U.S. and the flood of money provided by the Fed in the weeks after March’s market spasm.

But since the Fed’s statement last week, the euro has topped, the dollar firmed and goldrecovered its bullish bias within its current consolidation range.

The news from Brussels this morning, a quad-witching day no less, added a little more fuel to the rally in gold, as it looks to me like the “safe-haven” trade is back on.

I still feel that the problems in Europe become the epicenter of the next wave of this unfolding financial crisis. This Wolf Street article by Nick Corbshley does a great job of highlighting just how quickly Italy’s small and medium enterprise cash flow problems are soon to become all of Europe’s problems.

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