A round up for this week.
Gold and the shares have been particularly volatile this week as speculators and investors have been contending with a plethora of news from Europe, forcing traders to make quick and sometimes rash decisions, often missing the bigger picture. This Tuesday we saw the Swiss National Bank (SNB) peg the Swiss Franc to an ailing Euro. On announcement, the CHF fell 8.8% almost immediately against the Euro eliminating one of the two last safe havens for investors, no points for guessing what the one remaining alternative is.
Pegging the CHF to the EUR to save the Swiss economy is a double edged sword at best. Particularly as Bloomberg has just announced that Angela Merkel’s government is preparing to shore up German banks in the event that Greece fails to meet the terms of its aid package. German Finance Minister Wolfgang Schäuble described Greece pragmatically as being “on a knife’s edge”. A failure of Greek obligations for the first time has become a very real contagion threat to banks and governments alike. If allowed this would result in a collapses of credit, followed by a frantic attempt by the European Central Bank (ECB) hitting the printing press to restore liquidity. I try to stay away from evocative adjectives, however this is all very dangerous territory.
Also in this week’s news, we heard the ECB has yet again been buying up it's own debt, now holding over €129bn worth of Eurozone government bonds. This data was released after the additional purchase of €13.3bn worth of treasuries bought last week alone in a vain attempt to shore up demand for the failing currency. When we see banks buying up their own bonds like this, it is nothing more than purely inflating the money supply. Ultimately as of today, top German official of the ECB Jürgen Stark, has quit his job over the disagreement of the ongoing bond buying practice.
"Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president," said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to Bundesbank chief Jens Weidmann.
"It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB."
All this means is it has become increasingly important to correctly gauge the role of gold and silver amongst the problems of today's economies and how it is used by investors. Gold has perpetually proven it's ability to hedge against inflation. Also holding up against deflation aswell when money is flowing out of stocks in into hard assets for the reasoning that investors adjust portfolios based on minimising counter-party risk.
So with the Swiss Franc out of the game, the outlook certainly remains bullish for gold and silver. However further volatility may ensue as we look to test $1900 for the 3rd time this upcoming week. If the $1900 mark can be held easily it is expected by many investors to see much less resistance and a faster climb to $2100 for near term targets. Lets hope the traders holding short positions in large volumes are running out of steam.
Next key date is the FOMC meeting on 20th and 21st September.
http://uk.reuters.com/article/2011/09/09/uk-eurozone-idUKTRE7882SO20110909
http://www.cityam.com/news-and-analysis/the-ecb-bond-buying-spree-hits-129bn
Richard Valentine