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Gold and silver are lower today with
profit taking, Chinese bond buying and increased risk appetite being cited
for the price falls. Gold is marginally lower in all currencies and is 0.2%
lower in U.S. dollar terms despite the dollar coming under selling pressure
again this morning. Risky assets have recovered somewhat from recent losses
with Asian and European equities and commodities receiving a bid.
Cross Currency Rates
Reports of China buying Eurozone government debt may have led to a rise in the
euro and equities. However, the scale of sovereign debt risk internationally
is such that even significant and ongoing Chinese buying would be unlikely to
contain the crisis.
Sovereign debt risks in Europe and
internationally continue to threaten the increasingly fragile economic
recovery.
While most of the focus has been on
Greece and Eurozone sovereign debt issues, the not
insignificant risk posed by a U.S. sovereign debt crisis increases by the
day. The risk of a US default continues to rise which can be seen in the sharply
increased cost to insure U.S. sovereign debt.
Risk of a U.S. default can be seen in
the credit default swap (CDS) market. 1 year U.S. CDS has risen from 23 to 37
or by 60% in the last six trading days (see chart below). According to this
measure, the U.S. is now more likely to default than Slovenia and Indonesia
in the next year.
US CDS 1 Year –
3 Month Duration – US (brown), Japan (Yellow), UK (Purple)
In the more liquid 5 year U.S. CDS,
the cost to insure has risen by some 50% in the last week. The U.S. is
considered more likely to default in 5 years time than South Africa,
Malaysia, Panama, Brazil and Colombia.
Credit default swaps on U.S. debt saw
a flutter of activity in the past week with investors placing 135 trades in
U.S. CDS in the week ended May 20, far above previous weeks, when in some cases
only one contract trade was seen.
This compares to 360 CDS trades in
the week on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on
Italy.
Volumes in U.S. CDS have been ticking
up, though at about $4 billion they remain significantly lower than the $9
trillion in outstanding U.S. Treasuries.
The squabbling between Democrats and
Republicans last week as the U.S. debt ceiling of $14.3 trillion was being
reached did not help sentiment towards U.S. debt.
Gold Bullion in US
Dollars – 30 Days (Tick)
Nor did former Soros’ partner Stanley
Druckenmiller, the billionaire former-hedge fund
manager and legendary investor, comment in the Wall Street Journal that the
Federal Reserve’s bond purchases are a fraud and a “Ponzi scheme”.
He advocated a U.S. default or a
technical default, saying “technical default would be horrible, but I
don't think it's going to be the end of the world. It's not going to be
catastrophic."
Credit default swaps are far from a
perfect way to establish credit worthiness and risk of default of countries.
However, it is arguable that quantitative easing and governments
internationally, including the US, electronically creating money in order to
buy huge tranches of newly created government debt has significantly
distorted the government debt markets. Thus, record low yields are artificial
and are not a good way of measuring fiscal and monetary risk.
The market manipulation that is QE1,
QE2 (and possibly QE3, QE4 etc.) has completely distorted the free market in
U.S. government debt and indeed all capital markets. It has led to
artificially low interest rates in the US and internationally.
It has been successful in the short
term in keeping yields low but short term panaceas have a habit of becoming
long term illnesses.
While a US default would not be
“catastrophic” it would likely lead to a very sharp fall in the
U.S. dollar, (especially versus the hard currency, collateral and monetary
asset that is gold), sharp fall in U.S. bonds and sharply higher interest
rates.
This has the potential to create
another systemic crisis involving sovereign nations and banks globally and
could lead to a deep recession, a Depression and in a worst case scenario -
hyperinflation.
Gold
Gold is trading at $1,520.69/oz,
€1,072.87/oz and £932.65oz.
Silver
Silver is trading at $37.13/oz,
€26.20/oz and £22.74/oz.
Platinum Group
Metals
Platinum is trading at $1,770.75oz,
palladium at $745/oz and rhodium at $2075/oz.
News
(Reuters) -- Gold
ticks up near 3-week high on euro debt jitters
http://www.reuters.com/article/2011/05/26/mar...E7GQ03820110526
(Wall Street
Journal) -- Bid to Use Gold as Collateral Advances
target="_blank" http://online.wsj.com/article/SB1000142405...1431026850.html
(MarketWatch) -- Gold gains; silver rallies more than 4%
target="_blank"
http://www.marketwatch.com/story/gold-f...ding-2011-05-25
(Reuters) -- China
gold output at 400 T this year - China National Gold Group < target="_blank"br>
http://www.reuters.com/article/2011/...E7FQ02G20110526
(Bloomberg) --
Gold Is Becoming the ‘Preferred Coin of the Realm’ in Europe, Gartman Says
http://www.bloomberg.com/news/201...rtman-says.html
(Wall Street
Journal) -- PRECIOUS METALS: Gold, Silver Rise On Safe Haven Buying?
http://online.wsj.com/article/...525-712862.html
Commentary
(MoneyWeek) -- Gold will hit £1,000 an ounce by
October
http://www.moneyweek.com/in...Money%2BMorning
(ZeroHedge) -- Welcome To Hyperinflation Hell: Following
Currency Devaluation,Belarus Economy Implodes, Sets
Blueprint For Developed World Future
http://www.zerohedge.com...plodes-sets-blu
(Yahoo Finance) --
Shades of 2008: A Greek Default Won’t Be ‘Contained’, John
Mauldin Says
http://finance.yahoo....-112353535.html
(King World News)
-- Russell – Expect $5,000 as US Has to Back Currency With Gold
http://kingworldne..._With_Gold.html
Mark O’Byrne
Goldcore
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