Daily Market Update

EU Sees Political Deal On ESM And Bail-Ins By June

Today’s AM fix was USD 1,289.00, EUR 933.25 and GBP 762.54 per ounce.
Yesterday’s AM fix was USD 1,291.25, EUR 926.03 and GBP 761.13 per ounce.

Gold fell $0.20 or 0.016% yesterday to $1,289.20/oz. Silver slipped $0.14 or 0.73% to $19.17/oz.

Spot Gold Price in U.S. Dollars – 5 Days (Thomson Reuters)

Gold held steady around $1,290/oz today, underpinned by strong chart support. Unless, it rises by some 1% today, it is set to fall marginally for a second week. Traders are likely to be nervous about being short gold due to the “event risk” given the significant continuing geopolitical tension due to the crisis in Ukraine.

Despite the losses this week, the fundamentals remain sound. One of these key fundamentals are still ultra loose monetary policies. This week heard confirmation that the monetary policies of the Federal Reserve, ECB and Bank of England are set to remain ultra loose and in the ECB’s case may become even looser.

ECB president Mario Draghi said yesterday that the bank was ready to take action next month to boost the euro zone economy if updated inflation forecasts merited such a move.

The dollar extended gains against the euro today after posting its biggest one-day drop in nearly two months yesterday, as investors positioned for more dovish monetary policies from the European Central Bank and the increasing possibility of ECB currency printing and debt monetisation.

Gold appears to be consolidating and has found solid support at its 100 day moving average at $1,287/oz – see chart below.

Gold rallied to three-week highs on Monday at $1,315/oz on the back of elevated tensions in Ukraine, but it failed to maintain those gains after Russian President Vladimir Putin said he was willing to negotiate with European officials over the crisis.

Spot Gold Price in U.S. Dollars – 10 Years (Thomson Reuters)

Pro-Moscow separatists in eastern Ukraine ignored a public call by Putin to postpone a referendum on self-rule, however, declaring they would go ahead on Sunday with a vote that could lead to war.

While tensions with Russia have abated, it appears to be the case of the calm before a possible  geopolitical storm.

Gold premiums in India, the world’s second biggest bullion consumer, slipped marginally this week.  Premiums remain elevated at nearly $100 per ounce, showing that demand remains robust despite  expectations of a relaxation in import curbs. The relaxation in import taxes is expected to lead a significant increase in official Indian demand again.

Among other precious metals, silver was up 0.1 percent at $19.15 an ounce, while spot platinum was down 0.6 percent at $1,424.40 an ounce and spot palladium was down 0.2 percent at $799.22 an ounce.

Platinum group metals prices have been supported by the geopolitical tension with Russia and the long running miners’ strike in major producer South Africa, currently in its sixteenth week.

Prudent buyers will continue to dollar cost average into precious metal allocations on weakness.

EU Sees Political Deal on ESM And Bail-Ins by June
EU finance ministers are nearing political agreement on how the EU’s firewall fund could provide direct aid to banks after bail-ins, Dutch Finance Minister and chairman of eurozone finance ministers, Jeroen Dijsselbloem has said.

The European Stability Mechanism’s (ESM) direct bank recapitalization tool and
bail-ins have been developing for nearly two years. Dijsselbloem said there was broad support for his latest proposal, which sets conditions for when and how bail-ins and the bank-aid tool will be usable in 2015.

“We made very good progress” Dijsselbloem told reporters in Brussels after he led a meeting of his euro-area counterparts. The plan “will allow ministers to seek, where necessary, a parliamentary mandate in view of a political decision which we can then take before our next regular meeting of June 19,” he is quoted as saying by Bloomberg.

A long-running debate over backstops has direct implications for the success of the European Central Bank’s stress tests of 128 banks – many of which are still vulnerable.

Dijsselbloem said the planned guidelines will be most important during the year before the start of new EU rules in 2016 on how to assign losses to creditors at failing banks.

The EU’s bailout fund, the European Stability Mechanism (ESM) , could directly invest in a troubled bank next year, after 8% of the bank’s total liabilities are written off, Dijsselbloem said.

The bloc’s leaders agreed in 2012 that the ESM must have the option of directly buying a stake in a troubled bank to break the "doom loop" that binds indebted governments to the unstable banks they are trying to prop up.

Jeroen Dijsselbloem, who chairs meetings of eurozone finance ministers, said ministers agreed the ESM should be able to bail out banks next year after the option of raising money from “private investors” or the government failed.

He again failed to mention that money would also be “raised” from savers and depositors.

This means the direct investment of the euro zone bailout fund in a troubled euro zone bank would be a last-resort measure after all other options, including depositor bail-in, were exhausted.

Once the Bank Resolution and Recovery Directive is fully in force from the start of 2016, not only a bank’s shareholders but also bondholders and even large depositors will lose money before government or euro zone money could be used to save a bank from collapse.

It seems likely that in the event of another Northern Rock, Bear Stearns or worse Lehman Brothers like systemic crisis that the EU would expedite the ESM and bail-in legislation. 

EU politicians and bureaucrats say that this is part of the effort to prevent another debt crisis flare-up.

Critics fear that bail-ins are another way of protecting indebted large banks at the expense of already hard pressed savers and depositors including small and medium size businesses – the backbone of most economies.

EU policy-makers call this a bail-in, contrasting it with using taxpayers’ money to bail out failing banks.

There appears to be a complete failure to consider and understand that there is a risk of creating a new “doom loop” between indebted governments, creditors who are wiped out and some who are turned into debtors and unstable banks. There is also a failure to realise that bail-ins will likely result in capital controls and all the attendant negative consequences that they have on an economy.

Not to mention, the dreadful effect bail-ins would have on already fragile consumer and business sentiment is struggling Eurozone economies.

As our extensive research points out, bail-ins create a risk of runs on banks – thereby making indebted banks even more insolvent and entrenching the “doom loop” that policy makers are attempting to prevent.

The coming bail-in regimes will pose real challenges and risks to investors and of course depositors – both household and business.

Return of capital, rather than return on capital will assume far greater importance.

Guide: Protecting Your Savings In The Coming Bail-In Era



Mark O'Byrne
Executive Director


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