-- Posted Tuesday, 10 January 2012 | | Disqus
By Peter Grant
Gold ended the first week of the new year up more than 3% from its 2011 closing price. The yellow metal is off to a robust start this week, once again trading in close proximity of the 200-day moving average (1635.86). A definitive close above this level is still awaited to bolster bullish sentiment. The high from 2-weeks ago at 1641.65 is an important level to watch as well.
Renewed euro weakness has been a central theme recently, and despite the corresponding dollar strength, gold has displayed impressive resilience. A decent German bund auction last week failed to allay worries about upcoming periphery debt sales. A point that may have been driven home when the French saw their borrowing costs rise amid persistent rumors of an impending downgrade. Spain and Italy will attempt to sell bonds this week and global investors will be eying demand closely. They'll also be watching to see if the ECB steps in to cover any absence of "real" demand; primarily as an indication of the central bank's relentless creep toward full-on quantitative measures.
The marked retreat in the euro, particularly against the dollar and yen, suggests the market isn't terribly optimistic. There continues to be strong interest in dollar swaps and parking of funds in the ECB's overnight facility, suggestive of ongoing stresses in the European banking system, or perhaps preparation for a black swan event. Deposits in the ECB overnight facility hit a new record high of €464 bln last night.
Black swans by their very definition are difficult to predict, but clearly what everyone remains worried about is the EU fracturing. If Greece for example were to exit the EMU — as they again threatened to do last week — it might well stop at Greece, but then again it might not. There are many respected economists and analysts that maintain that the monetary union can't possibly hold together in its current form. Many banks and corporations have taken proactive steps to shield themselves against this possibility. Building a cash buffer — accumulating both euros and dollars — is a piece of that reality. It is also widely believed that the EFSF/ESM is a very flimsy firebreak between Greece and the rest of the periphery.
What policymakers in the eurozone (and elsewhere for that matter) are desperate to prevent is a disorderly breakup. If some event were to trigger such a disorderly breakup, the global repercussions would make what happened in 2008/2009 look like a walk in the park by comparison. For the same reason, the ECB would almost assuredly move aggressively to prevent such a catastrophe. I've always believed that the Germans need to be scared just enough to squelch their fears about inflation. If that point is reached, the ECB will follow the QE path blazed by the BoJ, Fed and BoE before it. As for the rule of law; sometimes its just easier to ask forgiveness than permission.
It is these twin fears that are underpinning the gold market: The fear that the whole system could still come crashing down around our ears, as it nearly did just a couple of short years ago. And the fear that the central banks will do whatever it takes to prevent that from happening. Truly we are between Scylla and Charybdis.
The central banks are trying to sail exactly between the two beasts, hoping to stay just out of reach of both. It's not an easy task though, as measures taken by one central bank have negative implications on others seeking to save their own bacon. One slight over or under reaction could trigger a string of events that may well hurdle our collective ship into the maw of one of those monsters.
As the legend goes, Odysseus chose to confront Scylla (a six-headed monster) and risk losing a handful of sailors, rather than to risk the loss of his entire ship to Charybdis (a whirlpool). It is my belief that most central banks view systemic risks, austerity and deflationary depression as that whirlpool. That would make expansive monetary policy and inflation Scylla in this analogy — the lesser of two evils. The Fed's move toward inflation targeting is a pretty telling indication of where our own central bank stands on this issue.
By the 8th century BC, when Homer is thought to have written the Odyssey, gold already had a long history of being used as money. And the striking of gold coins would commence just a century or so later. So when you think about how best to protect your wealth from stormy seas and sea-monsters, choose something that has withstood the test of time. Choose gold.
Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.
Peter Grant's commentary originally appeared on the Daily Gold Market Report page http://www.usagold.com/dailyquotes.html at USAGOLD.com.
-- Posted Tuesday, 10 January 2012 | Digg This Article
| Source: GoldSeek.com
