Gold is higher in Euros but mixed in other currencies this morning as the euro continues to weaken on sovereign debt and contagion risk. The euro has fallen against all currencies in recent days but especially against gold with euro gold having risen from below €1,050/oz on Tuesday to over €1,083/oz today. Sterling gold has risen to close to record highs at £950.81/oz after retail sales slumped on fuel and job fears.
Bloomberg European Crisis Monitor
Risk of Eurozone “Lehman Moment” & “Financial Armageddon” Sees Euro Gold on Verge of New Record High
Greek, Portuguese and Spanish debt is under pressure this morning. Greek bonds are being decimated with the 2 year government note now over 30%.
Irish bonds remain stable despite Ireland’s finance minister’s reasonable assertion that some senior bondholders must share the burden of losses. European equities are also under pressure on concerns of a “Lehman moment” in the Eurozone debt crisis.
Cross Currency Rates
The increasing talk of a “Lehman moment” in Europe is due to real concerns that a sovereign default could lead to contagion and a new global credit crisis which could send shock waves through markets and see risk assets come under pressure.
This time, the situation may be worse involving as it does both large sovereign and bank debtors and given the fact that it will be both a credit and solvency crisis. Talk of “financial Armageddon” is hyperbole – at the same time there are serious risks and investors and savers should prepare by owning less risky, high quality, liquid assets that will protect from these risks and the attendant risk of a currency crises.
Gold in Euros – 30 Days (Tick)
Euro gold looks very strong after consolidating in the last year. Gold at over €1,080/oz today is only some 7% above its price seen exactly a year ago. The gradual increase in price and recent period of correction and consolidation is hardly indicative of exponential gains which would be representative of a bubble.
Euro gold is less than 1% from a new record nominal high (when converted from Deutsche mark) against the euro. Record highs in euro terms (over €1,088/oz) should be followed by new record nominal highs in dollars and in recent years record highs in euros are a precursor to record highs in other currencies.
Indeed, it appears that the real bubble is a form of bubble in paper currencies and in the euro which developed in recent years.
The recent crisis and period of deflation contributed to the erroneous belief that “cash is king” and in blind belief and confidence in cash and deposits.
This is changing again as people very gradually realise that the massive creation of money seen in recent years will lead to currency debasement and devaluation.
The rise of gold in all currencies shows how confidence in paper currencies, and increasingly the euro, as stores of wealth and monetary assets is gradually being eroded.
Gold in Euros – 1 Year (Daily)
This is clearly seen in the increasing preference of central banks internationally to favour gold as a monetary and reserve asset over the major currencies such as the dollar, the euro and pound.
Eurozone Central Banks Net Buyers of Gold in 2011 for First Time Since Inception of Euro – Global Central Bank Gold Demand Increases by 43% So Far in 2011
Central banks have already bought 129 metric tons in 2011 through April, exceeding last year’s total of 90 tons. This represents a sizeable 43% increase in demand when compared with the first four months of 2010.
The World Gold Council’s Managing Director Marcus Grubb told a conference in London today that central banks will be net buyers of gold this year and probably next year.
It must be remembered that these are declared central bank purchases and some central banks such as the People’s Bank of China have been quietly buying gold and not declaring their purchases and the increase in their gold reserves.
Given the scale of public debt and monetary challenges facing all major western economies and the global financial and monetary system, central bank demand is likely to continue not just into 2012 but for a few years more.
Indeed, the small holdings of many creditor nation central banks, especially in China and the rest of Asia, means that this demand is sustainable and not a short term phenomenon.
Indeed, it is a very important development that Eurozone central banks have become net buyers of gold in 2011. This is the first time that this has happened since the inception of the euro in 1999.
Eurozone central bank gold purchases have been small to date but what is more important is that this source of gold supply – from Eurozone central banks – looks unlikely to continue.
Indeed, this could be the beginnings of the Eurozone central banks buying gold as a monetary asset in order to protect the euro and hedge their exposure to the other reserve currencies such as the pound and most especially today’s global reserve currency – the U.S. dollar.
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