Gold edged higher in euros, pounds, dollars and all currencies Friday after the European Union leaders failed overnight to get all of the bloc's 27 members to agree a change in the EU treaty allowing fiscal integration as the ‘decisive’ summit in Brussels ended its first day in the early hours Friday.
Gold traded higher after the ECB interest rate cut yesterday, prior to sharp selling that came into the market at 1335 GMT. This led to gold falling 2% on the day and it is now down 1.3% on the week – again outperforming many equity indices.
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Market News International (MNI) reported that market sources said that the Bank for International Settlements, the Bank of England and the Federal Reserve have been “good sellers of gold” after it had popped to a fresh session high of $1,755.90/oz.
The MNI report has not been explored and there have not been any official denials of official selling.
From a trading perspective there is at least a ring of truth to the MNI report as the sharp fall in the gold price was counterintuitive given there was no negative gold news and indeed the news was bullish with significant risk ahead of the EU summit and continued ultra loose monetary policies and negative real interest rates.
Given the scale of the coordinated intervention in markets by central banks recently one would have to be completely naïve to dismiss the report out of hand. There is of course the historical precedent of the London Gold Pool which ended in failure.
However, before jumping to conclusions it would be good if the MNI report was looked at and some questions asked - in the finest traditions of journalism.
Markets reaction to the euro summit fudge was not as bad as some of the ‘end of the world in 9 days if no agreement’ theorists who fear mongered in recent days. Many of the ‘9 day’ doom merchants had banking and political interests and agendas.
European indices are tentatively higher despite losses in Asia.
At the end of the day, agreement or no agreement the fundamental challenge facing Europe and the developed world is humungous levels of debt in the banking sector and in the shadow banking system (derivatives with a value in the hundreds of trillions) and real global financial system.
The root cause of the problem is this debt, as has been pointed out by many for months and years now. The problem cannot be solved by socializing the debt and piling public debt on top of this private banking debt.
As long as the official policy response is the printing and electronic creation of trillions of dollars, euros and pounds and ‘bazooka’ style currency debasement remains the monetary panacea du jour, there will be no real resolution of this crisis.
Therefore, fiat currencies will continue to be debased and fall in value versus gold.
Myopic markets continue to have the attention span of a goldfish with the sole focus on the Eurozone crisis again in recent days while completely ignoring the global fiscal titanic as seen in the appalling finances of Japan, the UK and the US.
The iceberg approaches and we only see the tip of the iceberg.
The total net cost of the Federal Reserve’s bailout alone is now estimated at an incredible $29.616 trillion according to research from the Levy Economics Institute (see commentary).
The global debt crisis is not a short term phenomenon rather it is a medium and long term phenomenon that will challenge us for years. No magic wand solution from central bankers or politicians is possible.
One UK analyst made the witty comment this morning that the UK is “as isolated as someone left on the dock in Southampton as the Titanic sailed away.”
Witty, however it ignores the fact that this crisis is very close to or already in the early stages of contagion and very close to another Lehman Brothers systemic ‘event’. The UK and the massive liabilities in the City of London are very much part of the global debt titanic.
These huge fiscal and monetary challenges remain the reason why the vast majority of investors and savers are being prudent in having a healthy allocation to gold for the foreseeable future.
Gold will continue to reward and protect prudent investors and savers from negative real interest rates and global currency debasement.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.