Precious metals under renewed pressure

It had been pointed out several times in this blog that the status as a safe haven does not imply that precious metals were immune against stronger downside moves. This past week is another proof for this statement. Precious metals were under renewed pressure and only a rebound last Friday prevented even bigger losses. Gold ended the week down by 6.6% and platinum lost only slightly less at -6.4%. Silver and palladium are the more volatile precious metals dropping by 7.9 and 9.0% respectively.

The traditional fundamental factors for the precious metals were all negative again. The US dollar firmed not only against the euro but also against the other major currencies. The stock markets in Europe and the US headed all south and crude oil prices came under pressure. However, also the flow of funds data indicates that investors reduce holdings of precious metals. According to the latest CFTC report on the “Commitment of Traders”, large speculators have reduced their long positions in gold and slightly increased the short positions. Thus, the net long position has dropped by 9,208 to 150,503 contracts, the lowest value since the beginning of November. Also holdings in the biggest ETF, the SPDR Gold Trust, have been reduced last week by 15.4 tons to 1,280.0 tons.

The major factor weighing on precious metals remains the debt crisis in the eurozone. The rating agencies are not satisfied with the result of the EU summit on December 9. Standard & Poor’s already warned that all member states of the eurozone might be downgraded before the summit took place. Now also Moody’s has reduced the outlook for the eurozone to negative and Fitch also warns that six member states might face a lower rating. All three agencies refer to the outlook for GDP growth. However, the rating agencies became a part of the problem and are an obstacle for a solution. When the crisis broke out, the agencies demanded that austerity measures had to be taken to restore confidence. However, as soon as those measures had been taken, they lowered the rating of various states and referred to the lower growth prospects due to the austerity measures. This is now going on for various cycles and more and more countries face a downgrade. As long as the agencies threaten to cut the ratings of eurozone member countries, the market for government bonds in the eurozone has difficulties to calm down. This has also a negative impact on the euro exchange rate. Furthermore, fears of a global recession will not subside. Quite the opposite, they are more likely to get stronger like the warning of the IMF last Friday showed by comparing the current situation in the eurozone with the early 1930^th, the beginning of the global depression.

Have you ever wondered that there is only one German among the Noble laureates in economics? Just take a look at the German economic orthodoxy and it is no longer a wonder. The German government and the Bundesbank believe that a fiscal austerity policy would be sufficient to solve the debt crisis in the eurozone. However, they completely ignore the German past when the austerity policy of Chancellor Bruenning steered Germany right into the depression of the 1930^th. Furthermore, they are obsessed with the experience of the hyperinflation of the early 1920^th. This obsession leads to the refusal to accept any involvement of the ECB and national central banks in solving the debt crisis. Germany blocks the proposal to grant the EFSF or EMS a banking license, which would allow these institutions to buy government bonds in the secondary market and to obtain credit from the ECB, while the state owned Landesbanks in Germany and state owned savings institutions in other eurozone countries could also hold government bonds refinanced by loans from the ECB. Economically, this differentiation does not make any sense because the ECB is also indirectly involved in state financing if state owned commercial banks buy government paper.

At the EU summit on December 9, there was an agreement that central banks of the eurozone should lend 200bn euro to the IMF, which then could leverage the funds of the EFSF and the EMS. However, the Bundesbank is blocking this solution by demanding that the German parliament would have to approve such a loan and by insisting that further leading countries outside the eurozone also participate in providing loans to the IMF. However, the US already announced that they would not grant a loan to the IMF. The Fed can not participate due to legal reasons as chairman Bernanke explained. The president of the Bundesbank argues that providing a loan to the IMF, which then lends to eurozone governments, would be circumventing forbidden lending of the ECB system. However, the Maastricht treaty only rules out direct lending to governments. Without any involvement of central banks, the market for government bonds could not be stabilized in the short-run. As Lord Keynes ones said, “in the long run we all are dead”. Waiting for the austerity measures to restore investors’ confidence might take too long.

As long as Germany refuses that central banks play a direct or indirect role in stabilizing the government bond market in the eurozone, fears of a global recession will prevail. The markets already ignored positive economic data last week. The implications for the precious metals remain negative in this case. The rebound seen last Friday might just been some short covering.

This was the last article in this blog for 2011. The next article will be published on January 7, 2012. We wish all readers of this blog a merry holiday season as well as a happy and successful New Year 2012.