By Debbie Carlson
Chicago -- (Kitco News) --Gold prices might have fallen in reaction to the European Union’s bailout package for its ailing southern-member states, but the pull back appears to be nothing but a bump in the road to higher prices.

Spot and futures prices fell in early dealings Monday once the 750 billion euro aid package was announced, with futures prices falling nearly 2% at one point before curbing some losses. Meanwhile, the euro and global equities markets – stymied by worries that the initial debt-relief package for Greece wasn’t enough and that the debt problems bubbled under in other countries such as Portugal, Spain, Ireland and Italy would finally surface – rallied sharply.

The rally in riskier assets suggests, at least initially, that financial markets believe Europe really means it when it says going to stand the troubled southern euro-zone. The deal cobbles together funds from euro-zone countries, the International Monetary Fund, and the European Central Bank. Other global central banks, such as the U.S. Federal Reserve, are offering assistance.

What makes this aid package different than other EU and IMF offerings is the size, market watchers said. “This is a much bigger plan,” said Frank Lesh, futures analyst at FuturePath Trading.

Lesh said the early losses in gold likely came from investors who rushed in last week to buy in the flight-to-safety move unwound those positions. Yet gold is not seeing a big sell off which suggests it has legs to run higher.

“Gold is clicking higher. It’s a function of it now acting as an international currency. It’s unique because it’s a hard asset. Central banks are now acquiring gold as part of their reserves and I don’t expect that to change…. Currency volatility will continue and gold gains from that,” Lesh said.

Ron Coby, chief investment officer and founding partner of Coby Lamson Capital Management said he is “super bullish” not only the yellow metal, but also of gold stocks. “It doesn’t matter what country you are, countries are turning their currency in confetti,” he said.

Gold has seen a strong run on speculative-type buying, but safe-haven buying will become an important part of gold’s rally longer-term, even though the market may not be seeing that Monday.

“This bailout is not like any other. I’ve been negative on gold, but prices are going to go much higher. This is the first time in 12, 15 years that gold responded as a safe-haven,” said Leonard Kaplan, president, Prospector Asset Management.

Kaplan said all the European bailout plan does is “kick the can down the road a bit. That money will not go into other programs, so the recession (there) will continue.”

For long-time gold market watchers, it’s hard to imagine $1200 gold as a “safe haven” but as Kaplan said, it’s all about market perception. “Gold at $1200 is silly. Let’s be honest,” he said, noting he believes that gold as a safe haven value is more around $600.

“But before it goes there, could it go to $1500? Sure. $1800? Maybe. It depends on what happens. Will it all end badly? Yes. But that might not happen for five or 10 years. Look at the Nasdaq in 1999,” he said, noting the euphoria around internet stocks until the dot-com bubble burst.

Considering the concerns over sovereign debt and default, gold prices will likely be supported just under current levels. Kaplan said he would like to buy gold here, or at levels just slightly lower, around $1160 to $1170 on the idea that prices will rise.

He has doubts that the austerity plans for Greece will actually come to fruition and says the euro currency is “doomed.”

“Greece is not going to cut public salaries by 20%. They’re not going to raise taxes (sharply). It’s just not going to happen,” he said.

Lesh said there is plenty of buying interest on dips in gold futures, and he puts key support at $1,150 for the June Comex contract. He also said technical charts for gold futures are pointing higher, so the all-time intraday high set late last year will likely be taken out. “When it happens we’re going to blow right through it,” he said.

--By Debbie Carlson, contributing to Kitco News; Debbie.carlson1@gmail.com

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