27
Oct
2011

EU’s ‘Grand Plan’ Leads to More “Irrational Exuberance” and Prevents Contagion

Gold is trading at USD 1,722.10, EUR 1,228.20, GBP 1,076,  JPY 130,520 ,  AUD 1,622.40 and 10,955 CNY per ounce.

Gold’s London AM fix this morning was USD 1,708.00, GBP 1,067.83 and EUR 1,219.74 per ounce. 

Yesterday’s AM fix was USD 1,713.00, GBP 1,070.69 and EUR 1,229.54 per ounce.

Gold rose to a one month high of $1,728.70 immediately prior to the deal. It gradually fell as risk appetite returned to markets but has recovered some of the losses incurred going into the London AM Fix. Euro gold performed similarly. 


Gold in Euros – 30 Day (Tick)

Stocks and European bonds have surged in what appears to be another bout of misguided short term euphoria. This is especially the case as the ‘deal’ is long on promise and short on detail.

While, initial market reaction is that EU leaders have made a breakthrough in resolving the region’s two-year old debt crisis – it must be remembered that markets reacted similarly, in the short term, to previous EU ‘deals’.

This latest deal has all the hallmarks of another exercise in ‘kicking the can down the road’.

What is significant is how wrong markets read the situation with Greece which has now in effect defaulted despite continual assertions that they would not. 

The sacrosanct principle that sovereign nations have to honour and repay all their debt has been breached which will have obvious ramifications.


Gold in Euros – 1 Year (Daily)

The ‘bad boy’ of the class Greece has received debt forgiveness while the ‘good boys’ such as Ireland continue to be punished. 

Ireland which has diligently followed the ‘Troika’s’ advice resulting in austerity and a severe recession is due to pay back $1 billion to the unsecured and unguaranteed creditors of Anglo Irish bank next week.  Embattled taxpayers in Ireland are now demanding that their government renegotiate and secure better terms.

Contagion remains a real risk especially from Spain and Italy, which unlike Ireland, really are “too big to save”.

Italy’s debt alone is €1.8 trillion (bigger than the $1.4 trillion bailout fund)‎ and their 10 year bond has again risen to close to 6% in recent days. The deal overnight has resulted in the Italian 10 year bond falling to 5.795% – however official intervention is again likely.

Solutions that might have worked if enacted at an earlier stage are being rendered progressively obsolete by the rapidly deteriorating economic conditions (even Germany seems to be slipping back into recession) and terrible debt dynamics globally – including in China and the US. 

Differences between European sovereign states are becoming intractable and the assumption that agreement will always be found is naïve.

The detail of the EU debt deal and bank bail-outs and the scale of the European rescue fund is tortuous and convoluted. 

However, the underlying problem is much simpler. 

Europe’s elites know that for the euro to survive in its present form, it must move – with speed – towards full fiscal and political integration. 

Yet some national leaders, and the voters they answer to, are as yet unwilling to accept the loss of sovereignty, and indeed the shared liabilities, that such a revolution demands.

The concern is that the elites again try to fast track their way to a federal Europe and a form of super state against the wishes of their respective peoples. Far from safe guarding the euro, such an approach may lead to its disintegration and indeed may jeopardize the EU and the entire ‘European project’.  

Far from gold being a bubble, the real bubble is the European, U.S. and global debt bubble which is unraveling before our eyes with obvious ramifications for all fiat currencies.

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SILVER 
Silver is trading at $33.60/oz, €23.90/oz and £20.98/oz 

PLATINUM GROUP METALS 
Platinum is trading at $1,602.70/oz, palladium at $663/oz and rhodium at $1,525/oz

NEWS
(Reuters)
Gold falls after EU deal emboldens risk-takers

(Reuters)
Gold hits one-month high on EU debt plan

(Bloomberg)
Gold Helps Manage Risk More Effectively, World Gold Council Says

(The Telegraph)
World’s Largest Gold Coin Unveiled in Australia

COMMENTARY
(Zero Hedge)
Farce Is Complete As ISDA Finds 50% "Haircut" Is Not A Credit Event

(Mineweb)
Hands Off Germany’s Gold – Bild

(Wealth Wire)
Report: TSA Interrogates Travelers Carrying Gold and Silver

(Mineweb)
Camping it Up in Gold and Silver

(Money Week)
John Stepek: The Eurozone crisis isn’t nearly over: stay defensive

(Telegraph)
Evans- Pitchard: Europe’s grand gamble risks failure without ECB

 

 
Mark O'Byrne
Executive Director