The prices of gold and silver initially rallied this week from the lows
of $1170 and $15.93 respectively last Friday to challenge the $1200 level for
gold and $16.70 for silver on Wednesday, before losing about half these gains
yesterday.
On the year gold, is now hardly changed while silver is up 5% and is one
of the best performing assets in financial markets over this timescale.
Precious metals appear to be locked into the same torpor as other markets,
but there are two developing stories. At the beginning of this week
government bond yields were low with negative rates commonplace, despite
record government borrowing. Rational investors are barely involved in bond
markets, remaining for the most part side-lined in the knowledge these
distortions cannot last forever.
However, as the week progressed, a reaction in US Treasuries set in with
the yield on the US 10-year Treasury rising sharply to 2.29%, shown in the
chart below (though a reaction to 2.19% set in this morning). The dotted line
is the neckline of a head-and-shoulder reversal chart pattern now completed,
suggesting Treasury yields might be at risk of rising significantly higher,
taking other bond markets and lower-grade bonds with them.
Since early February 10-year Treasury yields have risen 37%, implying
large portfolio losses for the banks loaded up with sovereign debt. This week
has seen similar rises in other key sovereign bond yields, and the losses in
investment-grade and junk bonds have been correspondingly greater. The
importance of this development for precious metals is that deteriorating bond
markets increase the likelihood of new rounds of quantitative easing.
It could be that at last bond markets are beginning to discount the growing
likelihood that Greece will default on its debt and that the Greek banks will
fail. This is the second developing story, also likely to affect gold and
silver.
Professor Steve Hanke of John Hopkins University recently pointed out that at
the end of last year the book value of bad debts on the Greek banks' balance
sheets exceeded the sum of tangible bank equity and reserves by between 22%
in the case of the National Bank of Greece, to as much as 165% in the case of
Piraeus Bank, with other banks falling in between these extremes. Furthermore
in the last five months deposit withdrawals have accelerated, making the
position worse. This being the case, not only are Greece's banks insolvent,
but Greece has the potential to be Europe's "Lehman moment", with
all the unintended consequences implied.
Greece's default and the failure of its banking system now seem inevitable.
The remaining question is what monetary support the ECB will offer to prevent
other Eurozone bond yields from rising further, and what assistance it will
extend to highly-geared Eurozone banks whose own viability may be threatened.
Lastly, the UK's unexpected election result this morning initially boosted
sterling. Whether or not it holds this rise only time will tell.
Next week
Monday
UK: BoE Interest rate decision, BRC Retail Sales Monitor.
Tuesday
Japan: leading Indicator (Prelim.), Bank Lending Data, Current Account.
UK: Industrial Production, Manufacturing Production, NEISR GDP Est.
Wednesday
UK: Average Earnings, Claimant Count, ILO Unemployment Rate.
Eurozone: GDP (1st est.), Industrial Production.
US: Import Price Index, Retail Sales, Business Inventories.
Thursday
Japan: M2 Money Supply, Economy Watchers Survey.
US: Initial Claims, PPI
Friday
Japan: Consumer Confidence.
UK: Construction Output.
US: Empire State Survey, Capacity Utilisation, Industrial Production, Net
Long-Term TICS Flows
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