Nuclear Option of $1 Trillion EU Bailout Loans Leads to Renewed Market Euphoria

Gold

The unprecedented $1 trillion EU bailout and printing money to buy bonds package has led to renewed risk appetite. It has seen equity markets surge in a euphoric buying splurge (European stock markets are up between 4% and 11%) and the euro has strengthened against most currencies (see Cross Currency table). Gold has fallen 0.8% in dollar terms and by more in other currencies and the bouncing euro.

Gold is higher in Japanese yen after the Bank of Japan offered another two trillion yen ($21.6 billion dollars) in liquidity to financial institutions for a second trading day in a row to calm markets rattled by Greece’s debt woes. Gold was a little overbought in the short term and due a price correction anyway and given the sheer scale of the EU measures, those investing in gold will be encouraged by gold’s robustness.

Gold dipped to $1,192/oz early in New York before rising to $1,212/oz, it then closed with a gain of 0.97%. It has dipped from $1,199/oz to $1,184/oz in Asian and early European trading this morning but recovered since. Gold is currently trading at $1,193/oz and in euro and GBP terms, at €918/oz and £796/oz respectively.

Whether this initiative will succeed remains to be seen and it would be wrong to assume that the worst is definitely over. In the short term the measures undertaken appear to have contained the crisis, however there remains a real medium and long term threat of moral hazard and the euro’s credentials as a hard currency have been severely tarnished. This huge and unprecedented bailout ignores the root cause of the problem which is massive levels of debt in the eurozone (banking and sovereign debt). Creating more debt which will have to be paid back by EU citizens may be a case of simply postponing the inevitable financial and economic pain and it may jeopardise the viability of the single currency and lead to a depreciated currency and inflation. Also it may lead to higher interest rates in the long term.

US Gold Coin Sales Surge on Contagion Concerns

US gold coin sales have surged in the first week of May. Reuters reports that US gold coin sales surged as the anxiety over a eurozone debt crisis spilled over into the United States and as Thursday’s sudden Wall Street collapse shook investors. The US Mint sold gold coins this week at twice its normal pace, and bullion dealers have seen a significant increase in demand. Physical gold products such as coins and bars are traditionally a safe haven for anxious investors in times of economic and geopolitical crises.

Gold coin and bar dealers also said investors are turning to gold coins to protect their nest eggs from financial market turmoil. On Friday, the US Mint said sales of the most popular American Eagle one ounce gold coins totalled 41,500 ounces so far in the first week of May, compared to 60,500 ounces in the entire month of April.

Silver

Silver has range traded from $18.18/oz to $18.48/oz this morning in Asia. Silver is currently trading at $18.41/oz, €14.17/oz and £12.30/oz.

The US Commodity Futures Trading Commission issued a warning to the market on Friday to remind participants that speculative trading limits apply throughout the trading day as well as at the end of trading. Silver prices surged some 5% on the news and silver continues to have the most promising fundamentals of all the precious metals.

Platinum Group Metals

Platinum is trading at $1,697/oz and palladium is currently trading at $532/oz. Rhodium is at $2,825/oz.

News

Iridium rose 1.7 percent to $605 an ounce, the highest price since at least January 2001, according to prices from Johnson Matthey Plc on Bloomberg. Ruthenium gained 2.1 percent to $245 an ounce, the highest price since October 2008 (Bloomberg).

Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market. The probes are centering on whether or not JPMorgan, a top derivatives holder in precious metals, acted improperly to depress the price of silver, sources said. The Commodities Futures Trade Commission is looking into civil charges, and the Department of Justice’s Antitrust Division is handling the criminal probe, according to sources, who did not wish to be identified due to the sensitive nature of the information. The probes are far-ranging, with federal officials looking into JPMorgan’s precious metals trades on the London Bullion Market Association’s (LBMA) exchange, which is a physical delivery market, and the New York Mercantile Exchange (Nymex) for future paper derivative trades. JPMorgan increased its silver derivative holdings by $6.76 billion, or about 220 million ounces, during the last three months of 2009, according to the Office of Comptroller of the Currency. Regulators are pulling trading tickets on JPMorgan’s precious metals moves on all the exchanges as part of the probe, sources tell The Post. JPMorgan has not been charged with any wrongdoing. The DOJ and CFTC each declined to comment, as did JPMorgan. The investigations stem from a story in The Post, which reported on a whistleblower questioning JPMorgan’s involvement in suppressing the price of silver by "shorting" the precious metal around the release of news announcements that should have sent the price upwards. It is alleged that in shorting silver, JPMorgan sells large blocks of silver option contracts or physical metal — actions that would bring down the price of the metal — closely following news that would otherwise move the metals higher (New York Post).

The slump in commodity prices is a “buying opportunity,” Goldman Sachs Group Inc. said in a report today.“We remain most constructive on crude oil, copper and precious metals, with copper in particular looking particularly attractive post the recent severe sell-off,” the bank said in a report. Goldman maintained its 12-month outlook for returns from commodities at 17.6 percent. The bank’s forecast relates to the S&P GSCI Enhanced Total Return Index.

Mark OByrne

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