Gold with new record high

After gold has reached a new record high in the previous week and also closed above the previous high, there is certainly still scope for a further rise. However, we advise caution, because the reasons for the increase to a new record are by no means convincing, and gold does not follow the usual fundamentals. Once investors return again to a sober analysis, this could have a negative impact on gold.

The participants in the financial markets form rational expectations. This is assumed by the academic theories. But it was observable during the financial crisis in 2008 that this assumption is not justified. And the development in the financial markets in the previous week clearly underlines this again. The herd of lemmings and the "stories" of analysts and so-called star economists to get the attention of the media play an essential role in the development of the markets. In addition, some commentators do not understand the context. The best example is the German magazine Wirtschaftswoche, which reproduced on the front page of the current issue a death notice for the euro. But it is well known, that those who are assumed to be dead live very long.

The EU decided in a late night meeting before the market opened last Monday (11th May) to defend the euro with a package with a total volume of € 750 billion. The ECB has held the same night a conference call and voted with a broad majority that it buys government bonds in the secondary market, but is absorbing the liquidity provided thereby otherwisee. The ECB has taken the right decision in this situation, because it is their mission to secure the currency. The threat was a conflagration and the collapse of the European Monetary Union as a result of attacks by the rating agencies and financial markets on the countries of the so-called periphery. Through the purchase of bonds of the countries concerned, however, the yield spreads against government bonds and credit default swaps have reduced again. Again, it was the representative of a German institution being responsible that the initial positive development could not continue, but reversed. Bundesbank chief Weber has commented negatively on the impact of the purchase of government bonds in the secondary market. It is incomprehensible that this man is supposed to be the next President of the ECB.

It is criticized by commentators that the ECB would have given up its independence with the decision on the purchase of government bonds in the secondary market. This is absurd, because the decision was still made by the Governing Council. The ECB is challenged to act quickly in crisis situations, and this was at the weekend concerned the case. Just because the head of the German Bundesbank does not understand the seriousness of the situation and the effect of the purchase of government bonds in the secondary market, it is not an issue of independence if the majority of the Council comes to a different assessment. Moreover, the ECB buys also bonds in the repo transactions. The only difference is that the ECB has not fixed timing for the sale of the bonds back to the original owner and the title can be held to maturity. And when ECB was forced to take the decision of the direct purchase of government bonds in the secondary market, this was due to developments on the markets. And of these, no central bank is truly independent.

The other criticism is the argument that the purchase of bonds in the secondary market would lead to inflation. This argument only testifies a fundamental lack of understanding of economic relationships. ECB President Trichet rightly stresses that the purchase of government bonds in the secondary market is no "quantitative easing is" as it is operated by the Fed or the Bank of England. The liquidity that is flowing through the purchase of the bonds in the market is absorbed again by other means. If the liquidity effect of a measure is sterilized, however, a widening of the balance sheet of a central bank - which is a prerequisite that can lead to inflationary effects - will be avoided. But even with a balance sheet extension, a rise of inflation is not the inevitable consequence. If the interbank money market does not function properly because the banks trust each other no more and prefer deposits with the bank, the balance sheet of a central bank can extended, but the net loans to commercial banks do not necessarily have to rise. The ECB sticks to its primary goal, to keep the inflation rate below, but close to 2%. Whoever sees inflation risks, also believes in ghosts in English castles or the monster of Loch Ness.

It is found also in another context that the expectations of market participants are rational. For many weeks the dominant fear in financial markets was that Greece could suffer a national bankruptcy and other countries in the euro area might be infected thereof. Germany has repeatedly stressed that further savings in the national budgets of the affected countries with a large deficit to GDP ratio is an indispensable prerequisite to agree to an aid package. With the decision of the previous weekend, the risk of state bankruptcy or a "hair cuts" has clearly diminished. But now the financial markets fear the impact of the austerity measures, which they themselves have forced governments to impose, on the GDP growth rates in the euro zone. A weaker growth would not lead to an acceleration of inflation. It is absurd to expect both developments simultaneously. After the initial recovery up to 1.307 against the U.S. dollar, the euro has therefore once again come under pressure and fell to 1.236 U.S. dollars by the close of the week.

The rise in gold prices is thus based on a total of no load bearing foundation. Major fundamental factors as the EUR / USD exchange rate and the oil price are negative. Inflation fears may well have driven the flight to gold as a safe haven, but it is unfounded and in the medium term, the eurozone is more likely to struggle with the opposite. The gold price may rise even further in the short run, but it applies the principle of "caveat emptor".