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All quiet on the gold and silver front

|Includes:SPDR Gold Trust ETF (GLD), SLV
2011-OCT-14

Silver coins Gold and silver prices had another quiet day yesterday, with both metals settling lower at the close of the Comex pit session in New York. Front-month gold futures lost $14 (0.8%) to settle at $1,667.30 per troy ounce, withthe equivalent silver contract down 3.4% to $31.63 per ounce.

The US dollar remained stable. Although the Dollar Index (USDX) has fallen below 77 this morning, the greenback could record further gains against the euro today on the back of news that Standard & Poor’s have downgraded Spain’s sovereign credit rating from AA to AA-. G20 finance ministers from around the world are meeting in Paris today, with discussion expected to centre on Europe’s sovereign debt crisis and problems in the banking sector.Reuters reports that representatives from outside the eurozone will “speak frankly when they meet their European counterparts.”

This is of course a gentle way of saying that finance ministers from outside the eurozone – not least US Treasury Secretary Timothy Geithner – will be banging heads together in an effort to increase the size and scope of eurozone bailout guarantees. In the final recourse, this must of course involve far more money printing from the European Central Bank. The last thing governments outside the eurozone want to see are chaotic sovereign defaults from the likes of Greece and Portugal, leading to bank failures across Europe, as these bank failures would inevitably lead to more banking problems in the US, UK, and other economies outside the eurozone. Banks are linked by chains of assets and liabilities (not to mention OTC derivatives) across all major economies; it is this dynamic which has GoldMoney’s James Turk warning that another “Lehman moment” in the banking system is imminent.

Non-US investors are continuing to dump US Treasuries at a rapid rate, with speculation that some of this could be Chinese selling in retaliation for the US Senate vote earlier this week in favour of protectionist measures against China. But as far as China’s position in the Treasury market is concerned, never has the old adage “when you owe the bank $100, that’s your problem; if you owe the bank $100 million, that’s the bank’s problem” seemed more apt. The US government owes China around $1.6 trillion – the real value of which will keep diminishing, thanks to Federal Reserve money printing.

The Chinese state knows this, but also know that their huge position in Treasuries means that to a significant degree, they are the market: if they sell too quickly, they risk destroying the value of their remaining Treasury holdings. As a result, they are slowly diversifying away from dollars and into eurozone debt – and doing all that they can to bolster their gold reserves.

Stocks: GLD, SLV