28-Oct (USAGOLD) — Gold surged this week on rumors, and then ultimately confirmation, that policymakers had agreed on a deal to address the Eurozone’s sovereign debt and banking crises. Whether or not the measures agreed to will actually mitigate the twin crises is subject to debate and will be under intense scrutiny in coming weeks, but for the time being anyway, the relief associated with more borrowed time (and money) has reignited risk appetite.
The EFSF bailout fund will apparently be expanded to about €1 trillion. Greek bond holders were arm-twisted into accepting a 50% haircut. And European banks will be recapitalized. While there wasn’t much detail beyond this, stocks were off to the races on Thursday and the euro rebounded to new 7-week highs.
The firepower of the EFSF will be amplified via leverage of at least 4x. Leverage was employed because it was politically unfeasible to ask EU member states to make additional contributions or guarantees to the fund. Productive northern European economies, particularly Germany, are loathe to provide any more assistance to what they view as profligate southern European states. Yet what is being widely ignored, is that the very leverage that has been used to bolster the EFSF, in the absence of further direct contribution, has dramatically increased the risk to all the guarantors!
Only Bundesbank President Jens Weidmann seems to have taken notice; warning that EFSF leveraging is similar in design to the leveraged products “that helped to cause the crisis”. I think most rational thinkers would acknowledge that you don’t extract yourself from a leveraged debt crisis by piling on additional leveraged debt, but extraction is probably not really the goal here. Policymakers are simply looking to buy more time. Time that is still getting more and more expensive on some fronts; as evidenced by the record high yield demanded in Friday’s Italian 3-year bond auction.
This is exactly what the bailout deal was supposed to prevent! It was supposed to ensure the market that EU sovereign debt beyond Greece was a safe and secure investment. Yet the markets still seem to have their doubts. And rightfully so; because once you forgive half of Greece’s debt, what’s the incentive for Portugal, Spain, Italy, Ireland, Belgium and a host of others to make the necessary fiscal sacrifices — austerity measures — to get their accounts in order? In fact, one might argue that Greece gets the sweetheart deal because they were the worst of the worst, benefiting by being the first to allowed to default. There may just be a benefit for a second mover, but beyond that, I would think that all bets are off. It can’t even be ruled out at this point that the end-game hasn’t already been set in motion. Cut your deal now, while there are still cards to be played…
Gold has retraced 50% of the decline from 1920.50 to 1534.06 and closed back above the 50-day moving average. Both are encouraging technical indications. The yellow metal has been boosted by a weaker dollar, that has suffered at the hand of a resurgent euro. Gold also seems to be reclaiming its roll as the safe-haven of preference. For even as the EU vows to go ‘all-in’ to save the union, talk of additional quantitative measures to reinvigorate the flagging US economy are on the rise as well. One thing we do know from recent history, hard assets like gold tend to perform admirably when bailouts and easy money are the order of the day.
The EFSF bailout fund will apparently be expanded to about €1 trillion. Greek bond holders were arm-twisted into accepting a 50% haircut. And European banks will be recapitalized. While there wasn’t much detail beyond this, stocks were off to the races on Thursday and the euro rebounded to new 7-week highs.
The firepower of the EFSF will be amplified via leverage of at least 4x. Leverage was employed because it was politically unfeasible to ask EU member states to make additional contributions or guarantees to the fund. Productive northern European economies, particularly Germany, are loathe to provide any more assistance to what they view as profligate southern European states. Yet what is being widely ignored, is that the very leverage that has been used to bolster the EFSF, in the absence of further direct contribution, has dramatically increased the risk to all the guarantors!
Only Bundesbank President Jens Weidmann seems to have taken notice; warning that EFSF leveraging is similar in design to the leveraged products “that helped to cause the crisis”. I think most rational thinkers would acknowledge that you don’t extract yourself from a leveraged debt crisis by piling on additional leveraged debt, but extraction is probably not really the goal here. Policymakers are simply looking to buy more time. Time that is still getting more and more expensive on some fronts; as evidenced by the record high yield demanded in Friday’s Italian 3-year bond auction.
This is exactly what the bailout deal was supposed to prevent! It was supposed to ensure the market that EU sovereign debt beyond Greece was a safe and secure investment. Yet the markets still seem to have their doubts. And rightfully so; because once you forgive half of Greece’s debt, what’s the incentive for Portugal, Spain, Italy, Ireland, Belgium and a host of others to make the necessary fiscal sacrifices — austerity measures — to get their accounts in order? In fact, one might argue that Greece gets the sweetheart deal because they were the worst of the worst, benefiting by being the first to allowed to default. There may just be a benefit for a second mover, but beyond that, I would think that all bets are off. It can’t even be ruled out at this point that the end-game hasn’t already been set in motion. Cut your deal now, while there are still cards to be played…
Gold has retraced 50% of the decline from 1920.50 to 1534.06 and closed back above the 50-day moving average. Both are encouraging technical indications. The yellow metal has been boosted by a weaker dollar, that has suffered at the hand of a resurgent euro. Gold also seems to be reclaiming its roll as the safe-haven of preference. For even as the EU vows to go ‘all-in’ to save the union, talk of additional quantitative measures to reinvigorate the flagging US economy are on the rise as well. One thing we do know from recent history, hard assets like gold tend to perform admirably when bailouts and easy money are the order of the day.
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