Gold extended its gains after German Chancellor Merkel and French President Sarkozy failed to deliver the goods at a joint press conference this afternoon. They both rejected a common eurobond and offered limp suggestions for helping the eurozone's almost two-year old debt crisis. Both leaders offered up a balanced budget rule that each member's parliament would have to pass and a financial transaction tax. Neither did anything to help stocks. "They keep going into a room and coming out with another plan to save the euro," says Chuck Butler, president of EverBank World Markets. This "weighs heavily on the euro and gives people the need to buy gold as a protection." A flurry of inflation points also boosted gold Tuesday. India's inflation reading for July came in hot at 9.22%, import prices in the U.S. rose more than expected by 0.3%, the World Bank said food prices soared 33% year over year, and prices in the U.K. rose to 4.4% in July.
Expectations are now that inflation in the U.K. could top 5% this year and with interest rates at 0.5%, real rates are a negative 4.5%. The longer real rates stay in the red, the better return investors get on gold as the currency loses value. Fears over debt, inflation and currencies are pushing gold up towards the $1,800 mark, which was surpassed briefly last week, but some experts think these high levels aren't sustainable. "Gold is overvalued in trading terms in the short term, as it has risen well above its moving averages," argues Mark O'Byrne, executive director at Goldcore, a bullion dealer. "There is the risk of a correction from these levels." O'Byrne says, however, that gold could see a parabolic move in the near future as stagflation might rear its ugly head -- double dip recession fears mixed with high inflation. "Increasingly, the question is not if we go parabolic rather it is when do we go parabolic?" O'Byrne points out that in the final phase of the bull market it 1979, gold popped 140% in a year. In 2011, gold prices have risen 26%. Whether or not today's rally is sustainable or just technical trading still remains to be seen. Jennifer Ropiak, vice president for NYSE Liffe US, says that "sometimes we get harsh moves because of short covering ahead of an event ... but other times that harsh moves are because people don't know what is going to happen."
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