Will the European Stability Mechanism Seek a Banking License?

Today’s AM fix was USD 1,587.50, EUR 1,309.39, and GBP 1,024.86 per ounce.
Yesterday’s AM fix was USD 1,573.00, EUR 1,300.54 and GBP 1,015.23 per ounce.

Silver is trading at $27.13/oz, €22.42/oz and £17.56/oz. Platinum is trading at $1,397.50/oz, palladium at $564.63/oz and rhodium at $1,150/oz.

Gold rose $5.10 or 0.32% in New York yesterday and closed at $1,582.30/oz. The silver price dropped to a low of $26.60 before it recovered and edged higher then finished unchanged on the day.  Gold rose and fell in Asian trading then began European market trading with a surge sending the price to nearly $1,589/oz and then it pulled back and settled near $1,585/oz.

Gold climbed again on Wednesday after poor economic data from Europe and America led the Wall Street Journal to report that the US Fed was close to taking new initiatives (QE3) to boost the US economy.  The Fed’s next policy meeting is to take place on July 31 and August 1st.

Spain now looks like it will need a sovereign bailout in addition to their 100 billion bank bailout. Yesterday’s record climb to 7.6% yields on the 10-year Spanish bonds show the risk the market senses. Due to the financial risk on the Eurozone, Moody’s Investor Service lowered the outlook on the EU’s temporary bailout fund, the European Financial Stability Facility (EFSF), just after downgrading the outlook on its 3 main economies earlier this week.

Recently gold has been taking most of its trading hints from the euro – dollar movements.  However, the yellow metal’s shine is coming back as the euro strengthened on comments by European Central Bank policy maker Ewald Nowotny.  Nowotny is a council member who run’s Austria’s bank  and he said he saw an argument for giving the European Stability Mechanism a banking license, which would give it access to funding from the ECB.

A few highlights from the interview in the Bloomberg article, “ECB’s Nowotny Says Euro-Area Economic Divergences Are Widening” is listed below:

On granting the ESM a banking license:

“I am not aware of specific discussions within the ECB at this point but it is of course a discussion we have at the European level. I think there are pro arguments for this, there are also other arguments, but I would see this as an ongoing discussion. It is not something that is only in the field of monetary policy, so this is part of a broad discussion. We never give specific comments on the discussions of the Governing Council.”

On the debt crisis:

“Definitely, the crisis is not over. That, I think, is pretty clear. On the other hand, I think one should not give too much weight to short-term developments. But one has to admit that also from the medium-term we have some elements that are not too positive. For me one important element is the real growth perspective, which for the euro zone as such is slightly negative, which as such is not a good thing. But what of course also is added to the problem is that we have increasing divergences within the euro zone, which of course doesn’t make economic policy easier for the ECB.”

“On the other hand, what we see is that a number of structural policy changes have been undertaken in the countries that have troubles and all these changes need time to produce results.”

“Markets are of course not giving much time. On the other hand, I think policy makers should not be too much market driven and should not engage in only very short-term view but should have some kind of medium perspective, which means that I do not see a need to react to every single market reaction.”

On the economic outlook:

“It is true that for the world economy in general the perspectives have worsened. This relates to all parts of the world economy including Europe.”

“Europe and the euro zone are important players of the world economy, but we are not the only players and we see a number of risks also in other regions. But in general one has to be aware that the growth dynamics of this year and maybe also of next year is going to be lower.

“I don’t think that they are increasing, but the downside risks that we had mentioned at an earlier stage have been materializing.

“What we see is — and this is in line with the risks that we had been aware of — that growth dynamics for the euro zone as such are tending to be lower than we had been expecting at the start of the year, and on the other hand inflation also tends to be lower and what we see is that divergences in the economic dynamics between member countries of the euro zone unfortunately have a tendency to increase.

“And this of course is a challenge, but this is typically a challenge that cannot be met by the ECB, but that has to be met by the countries involved.”

On Greece:

“Our working assumption is that Greece will be able to fulfill their requirements, but it is obvious that this will need quite substantial efforts from the side of the Greek government. This is part of the discussions that Greece will have with the institutions. The results of the Troika discussions will only be available end of August/mid- September.”

Stephen Flood

Stephen Flood is the CEO of GoldCore. He is a former Wall Street equity trader and FinTech expert. He has been involved in the precious metals markets since 2004 and has appeared as an expert contributor on CNBC, CNN, BBC, RTE & Bloomberg TV and has had articles published in the Irish Times, Irish Independent and The Sunday Business Post.

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