Swiss National Bank and Germany moved Gold

The precious metals posted losses compared to the close of the week before. As the US dollar index rose by 3.2% to 77.19 one might be tempted to attribute the decline of all precious metals to the stronger US dollar, which is normally a negative factor. However, the US dollar index rose steadily, while the precious metals showed a completely different trading pattern over the course of the week. Therefore, other factors have obviously also played a role.

On Tuesday, gold hit a new record high, but ended the trading day significantly lower. The decision by the Swiss National Bank to peg the Swiss frank to the euro triggered a stronger liquidation of gold holdings. The SNB announced to defend a EUR/CHF exchange rate of 1.20 and would be ready to buy euro at this exchange rate for unlimited amounts. This decision limits the potential for movements in USD/CHF to the fluctuations of EUR/USD. Thus, a weakness of the euro against the US dollar also implies a weakening of the Swiss franc versus the US dollar. The price of gold showed recently a closer correlation with USD/CHF. As the upside potential for a stronger Swiss franc appears now to be limited by the determination of the SNB to defend the target rate, the attractiveness of precious metals has also been reduced.

Another negative factor for the precious metals as a safe haven had been the German Constitutional Court, which rejected two law suits against Germany’s participation in the bailout of Greece. The ruling has strengthened the position of the German Parliament, the Bundestag. Its budget sub-committee has to approve payments made within the framework of the European Financial Stability Facility. Some commentators have regarded the ruling of the highest German court as a stop for further financial assistance or also for common “euro-bonds”. However, this is not the case. It depends on the details of such arrangements. However, neither the government nor the parliament is allowed to issue a blank check and other national governments have the discretion to decide about spending the money. Germany still has the possibility for financial aid but an automatism must be avoided. Therefore, Germany could still participate on measures to solve the European debt crisis.

On Thursday, the ECB decided to keep the interest rates unchanged, which was not a big surprise. However, the staff projections for GDP growth had been revised down. The ECB sees the inflation risks now balance, but those for economic expansion are to the downside. Thus, the ECB is no longer intending to hike interest further and even a rate cut during the final quarter of this year is possible. This had weakened the euro versus the US dollar, but the stronger US dollar did not lead to a further decline of gold.

Precious metals even recovered thanks to the stupidity of Wall Street. Fed Chairman Bernanke gave a speech to the Economic Club of Minnesota. Wall Street was disappointed that he did not announce new monetary stimulus measures but repeated more or less the positions outlined in August at the Jackson Hole seminar of the Fed. How insane are some traders and investors expecting the Fed chairman to announce new monetary policy measures at a luncheon? Decisions about monetary policy are not taken by the Fed chairman alone, but by all voting members of the FOMC. The FOMC could decide also via telephone conferences outside of the regular meetings. However, it is usually at those regular meetings that decisions about new measures are taken. Therefore, the Fed chairman can not announce new measures at a speech. He has to convince the council members to follow his proposals. Declaring that the Fed will implement new measures before the FOMC has decided would be an insult to other FOMC members, which could be counterproductive as the FOMC might vote against those new measures. However, as Ben Bernanke did not fulfill the unrealistic expectations of some Wall Street traders, the stock indices pared earlier gains and turned negative. This reversal supported the precious metals.

On Friday, gold rebounded from an earlier drop after stock markets sold off. It was again panic among traders and investors, which send stock markets south and thus, supported gold. The ECB chief economist Stark resigned. In the letter to ECB president Trichet, Mr. Stark wrote that he resigns for personal reasons and would stay in office until a successor had been appointed. This statement was supposed to be released after markets closed. However, two persons knowing about this resignation informed a new agency and stated the reason for this step would be the decision of the ECB council to buy Spanish and Italian bonds.

It appears that the source of this indiscretion was the German Government as the report on Reuters also named the under-secretary of the German finance ministry, Mr. Asmussen, as the potential successor for Mr. Stark. And indeed, FM Schaeuble proposed him to the Eurogroup at the G7 meeting. Also another leak from the German finance ministry increased the jittery among traders and investors. The German finance ministry is analyzing and evaluating the consequences of a possible Greek default. It would be careless not to do such a scenario analysis. And of course the question, whether the government would have to shield the German banks in such a scenario, has to be considered also. However, some sources again leaked to the media that Germany would shield its banks in the case of a Greek default. In financial markets, this was interpreted that Greece would already default over the weekend, some weeks before the report of the IMF, EU and ECB on Greece. Thus, German attacks on the ECB council and its independence as well as the attempt to aggravate the already poor economic situation in Greece have triggered a sell off in stock markets and a rally in safe haven Bunds, but also contributed to paring losses in precious metal markets.