Eurozone troubles are driving the price of gold to new highs, as investors scramble for the yellow metal as a safe haven and store of value. The European Union US$1 trillion rescue plan for its fiscally wayward members has raised concerns about the amount of debt being undertaken by the European Union members and the European Central Bank’s reluctant conversion to the religion of quantitative easing. Indeed, the prospect of the complete disintegration of the Euro has suddenly appeared on investors’ radar screens. And that has stimulated a sudden flight to safety, including the sanctuary of gold as a store of value and crisis hedge.

Why gold and not the US dollar? Certainly the US dollar will attract some capital that is motivated by fear. But if you were a trader who relied on the Euro as your reserve currency, it is difficult to move away from that position into the US dollar. An easier play would be to move out of the Euro and into gold. Which is probably what we have been witnessing lately.

Gold for future delivery continues to settle above US$1,200 per ounce. A level once considered a significant technical resistance point, but now playing a support role. No wonder options traders have taken an active interest in bullish trades on near-term contracts for gold mining companies, according to a report in The Wall Street Journal.

In fact retail interest in buying gold is similar to the kind of euphoria we observed in the 1970s and early 80s. That’s when gold climbed above US$800 an ounce.

On May 12th, the spot price for gold briefly touched US$1,243.10 per ounce in Comex trading. That represents a rise of more than 80 percent in the past three years. And to add more fuel to the speculative nature of the beast, “SPDR Gold Shares (NYSE: symbol GLD) exchange-traded fund now contains US$48.1 billion in assets, with the number of shares outstanding up
111 percent since September 2008,” according to Business Week.

Should investors be jumping on this bandwagon? On the one hand, gold will probably provide a hedge should the euro collapse. It might, as some bullish gold traders suggest, even surge above US$2,500 an ounce. But, and this is key, any move of that size will be short lived.

If the equity markets capitulate with no potential recovery, why would gold have any value? If you believe in “the-end-of-the-world” scenario – seemingly the best case for gold – wouldn’t you be better off owning a farm?

Having said that, aggressive traders might consider playing the short term momentum related to the euro debasement. That would include buying calls on some of Canada’s premier gold stocks such as like Goldcorp Inc. (TSX: G, Friday’s close $47.14), Barrick Gold Corp. (TSX: ABX, $47.08), and Agnico-Eagle Mines Ltd. (TSX: AEM, $66.45). Look at the Goldcorp June 48 calls at $1.65, the Barrick June 48 calls at $1.55 or the Agnico-Eagle June 68 calls at $2.60.