The gold price is rallying, up $12.28 to $1,143.53 per ounce after sliding 2% yesterday as investors unloaded investments tied to the price of gold following the U.S. dollar’s rally to one-month highs. Coming into today’s trading day, the gold price had declined $48.32, or 4.1%, thus far in December - and was down $95.25, or 7.8%, off its December 3 high. The decline in the shares of the gold miners has been even more pronounced. Canada’s S&P/TSX Global Gold Index has lost 12.5% over the past week while the Market Vectors Gold Mining ETF (GDX) has declined an even steeper 13.8%. Gold mining stocks followed both the gold price as well as broader equity markets lower yesterday on fears of a debt default in Greece. While an actual default would appear to be an outlier given the fact that Greece is a member of the European Union, the Greek stock market has been plunging in recent days - accelerating yesterday on a downgrade of its sovereign debt by Fitch. Yields on government bonds rose for the fifth consecutive day, rising to over 5.5%. The issue of the creditworthiness of sovereign governments has taken center stage over the past few weeks, beginning with the Dubai debt default in late November. While the United Arab Emirates defused the situation by coming to the rescue of overleveraged state-owned, Dubai World, investors have responded by punishing the stock market in Dubai - which is down 36% off its high. In addition to the debt issues in Dubai and Greece, another nation, Spain, received a downgrade today from a ratings agency due to its deteriorating financial position. Standard & Poor’s cut its outlook on Spain to negative from stable stating, “The change in the outlook stems from our expectation of significantly lower GDP growth and persistently high fiscal deficits relative to peers over the medium term.” It would appear that the steady deluge of news related to sovereign governments facing deficit and debt issues would provide a tailwind, not a headwind, to the gold price. However, as was evident last fall and in the first quarter of this year, global market participants still flee to the relative safety of the U.S. dollar in times of stress. Riskier assets, such as stocks and commodities, and even gold, are liquidated and funds flow in to U.S. dollars and U.S. Treasury bonds. In spite of the deteriorating fundamentals of both, for the time being, this is how the markets operate. Over a longer time frame, the downgrades of Greece and Spain are symptomatic of the declining fundamentals of nations across the globe, which are caught in a web of deficits and debts. The integrity and confidence of fiat currencies is slowly eroding. The rise in the gold price in terms of all the currencies of the world is illustrating this fact. While general liquidation of asset classes such as stocks and commodities can be expected to pressure the gold price and the shares of gold mining stocks over shorter time frames, every new downgrade of the debt of a sovereign nation adds fuel to the bull market in gold.

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