Gold not such a precious metal

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Following such an incredible run, it is not surprising to see some of those with immensely profitable positions starting to cash in their gold bars. After reaching yet another record high of USD 1,914 on Tuesday morning, the gold price has collapsed over the past couple of days, reaching USD1,729 at one stage overnight, a fall of almost 10%! The motivations for taking profits will vary, but among them would be the desire to offset some of the pain experienced by this month’s plunge in equity markets. There was talk yesterday that some of Europe’s central banks (which are very large holders of gold) have been active sellers, especially those of the more troubled sovereigns who might be motivated to generate some collateral.

Some traders were taking profits ahead of Bernanke’s Jackson Hole speech on Friday, no longer so convinced that he will opt for QE3 just yet, which if true is certainly a negative for the shiny metal. Also, some exchanges are starting to increase the margin requirements on gold, making it more expensive for investors and traders. Demand for the precious metal also tends to soften at this time of year. That said the fundamentals supporting gold, namely extremely low nominal interest rates, negative real interest rates and a loss of confidence in currencies as a store of value have not diminished. Gold’s hammering provided stocks with a boost, the DAX up 3.5% at one stage and the FTSE 100 2% higher. Large asset allocation shifts were very much in evidence yesterday, with investors lowering their exposure to both gold and bonds in favour of stocks.

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Commentary

The loss of impetus in Germany. Although overall economic conditions in Germany are still healthy, nevertheless there has been a perceptible slowing in the pace of growth over recent months. In the current month, the Ifo business climate indicator, one of the more respected gauges of economic performance in Europe’s largest economy, dropped more than expected to 108.7, down from 112.9 in the previous month. This follows the recent ZEW investor climate indicator for August, which recorded its lowest reading since December 2008. That said, the Bundesbank claimed earlier this week that the economy was still set to record growth of around 3% for the full year, which is very acceptable. Indeed, the normally cautious central bank described the domestic economy as “still very robust”, although the tremulations in the stock market had resulted in heightened uncertainty.

Germany divided over Greek bailout collateral. Finland’s agreement with Greece to obtain collateral as a precondition for contributing to the next bailout package has opened a real Pandora’s Box within European policy-making circles. As we noted yesterday, both Austria and the Netherlands (also AAA-rated) are especially troubled by the move, questioning the legality of the deal and even threatening to pull out of the bailout. Elsewhere, the likes of Slovakia and Slovenia have also intimated their desire to gain security for their loan contributions. And in Germany, the political debate on the issue intensified yesterday, with German Labour Minister Von der Leyen suggesting that gold should be posted as collateral for bailouts, a proposal that Angela Merkel quickly claimed was “not the right way”. Overnight, German Finance Minister Schaeuble is reported to have informed his party colleagues that Finland’s deal with Greece on collateral will not be accepted by other eurozone nations, according to the Handelsblatt. As Moody’s observed on Tuesday, this ugly spat highlights not just that Europe is conflicted over how much aid to provide to the likes of Greece, but also over whether aid should be provided in the first place. As Greece only remains solvent because of European and IMF loans, the demand by the Finns to have cash (from those European/IMF loans) placed into an escrow account is almost comical. If the rest of the eurozone pursued a similar approach to Finland, what possible benefit would there be for Greece to have all of its loan money placed in a lock-box? Finland’s approach is understandable given Greece’s track record for not delivering on previous pledges, but at the same time is somewhat unscrupulous. This issue is likely to rumble on over coming days.

Sarkozy chews the austerity pill. French President Sarkozy has now formally discussed his budget blueprint for 2012 with French PM Fillon, and in a departure from recent years, he has decided that the major theme can now safely be ‘responsible austerity’. Sarkozy is looking to lower the budget deficit by EUR 10bln next year, through measures that include the proper taxation of overtime, the abolition of tax breaks for companies and investors in overseas territories and a punitive tax on very high earners. His aim is to reduce the deficit to 4.6% in 2012, down from 7.6% in 2010.

Spain shows the way with a balanced budget amendment. In arguably one of the more positive developments for the euro in some weeks, the Zapatero government in Spain has vowed to implement a constitutional amendment that will enshrine a balanced budget and a public debt limit. Just last week, one of the few measures to come out of an otherwise disappointing meeting between Angela Merkel and Nicolas Sarkozy was a call for all eurozone members to adopt balanced budget. Encouragingly, the main opposition party seems minded to support it.    

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