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What's up with the gold price?
Very little besides Facebook. Gold is down, in fact. So is everything else
bar the US dollar and "safe" sovereign debt.
"I think what we can expect is a rate cut from the
ECB [European Central Bank]," said Joachim Fels, chief economist
at Morgan Stanley, to Bloomberg TV Wednesday morning. "I think they will
cut soon, as early as the June meeting...
"But unfortunately, a rate-cut alone doesn't do
the trick."
The trick, of course, is holding the euro zone together
by destroying the euro. Or at least decimating its value. You might expect
that to boost the gold price, and everything else. But very little makes
sense in finance right now.
"The least disruptive route Europe can take is to
sharply lower the value of the euro," says finance academic Jeremy Siegel in the Financial Times. "If devaluation
is a code word to mean raising the inflation target, fine," says
Princeton professor Paul Krugman. Our friends at
Standard Bank just cut their end-2012 forecast for the single currency from
$1.20, but only down to $1.15.
Because even with El Tro Part 3 or QE the First, the Esperanto is unlikely
to tumble.
How come? Now down less than 7% from its February high,
the euro is making for a very odd and very toxic asset, corrupting everything
but itself. Because when they got German interest rates and a global market
for their government debt, half of its sovereign members went nuts spending
and borrowing. But Germany itself pushed on with boring hard work, wage
restraint, and world domination in high-spec machinery and engineering. The
internal imbalance seems to demand a fiscal transfer – of German
savings to settle Club Med's bills.
At tonight's "informal" summit, however
– as at every summit to date – Chancellor Merkel is set to say
"Nein!" yet again. Why would Germany want to join Eurozone joint
bond issues? It's already gifted its credit rating to Mediterranean debt, and
look where that got us. Besides, Merkel can after all borrow money at 0%
rates, or near as dammit. Why doesn't the rest of Europe understand the
model?
This week's fresh impasse would surely send the euro
lower again, if only Germany weren't the euro zone's biggest economy. So
instead, the stress cracks run into everything else that isn't the dollar (or
'safe' sovereign debt). Including – bizarrely – the ultimate
default-or-devaluation protection of physical gold
bullion.
Western portfolio managers are now holding more cash
than any time since January's eight-year record, says Reuters. New York's
giant $64bn SPDR gold etf shed 17.5 tonnes on Tuesday, the largest one-day redemption since
August. The Indian rupee is hitting fresh record lows vs. the dollar,
worsening the outlook for the world's #1 jewelry buyers.
Hong Kong premiums over London spot prices are firm around $1 to $1.50 per
ounce, but trading volume is slipping in Shanghai.
In a credit deflation – which this is – and
after being buoyed by the global liquidity surge of the last decade, gold and
silver should be expected to hit turbulence at the least. That's even before you account for the sudden resurgence of the all-Apple,
Facebook-toting, shale-gas-laden US dollar. If resurgence you can call it.
On its trade-weighted index the dollar has reclaimed only an
18-month high, and has barely dented its 35% drop of the past decade. Just
imagine what trouble it's got in store for us all – US exporters and
consumers, as well as investors and debtors worldwide – if the thing
really does start to push higher.
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