By From Adrian Ash
As “Too Big to Bail” Risks Infecting German Bunds
THE PRICE OF PHYSICAL wholesale gold bullion bars touched a 1-week high for Dollar investors but broke new all-time records for Euro and Sterling buyers on Tuesday morning, as industrial commodities slipped and the US currency rose against all competitors bar the Japanese Yen.
The single Euro currency fell through $1.30, sending the gold price in Euros to new highs above €34,000 per kilo.
The British Pound also fell to a 10-week low vs. the Dollar, sending the gold price in Sterling to a new record high at Tuesday morning’s London Fix above £885 per ounce.
“Euro gold is the one to watch,” says a London dealer.
“We expect it to move higher,” agrees Walter de Wet at Standard Bank, noting that – so far in 2010 – industrial commodities have fallen faster when the Euro is weak than they have risen when the single currency rose.
“The only exception was gold…[which] increased on Euro weakness, confirming its status as hedge against credit risk.”
“Portugal [is] quietly insolvent, in our view,” says Citigroup’s chief economist in London, former Bank of England policy-maker Willem Buiter.
“Greece is de facto insolvent [and] Spain should be closer to Portugal and Ireland once its banking-sector problems are recognized.”
“With [selling in the bond] market moving rapidly onto Spain and Italy, it is possible that too big to fail becomes too big to bail,” says Gary Jenkins at Evolution Securities.
“It is worth noting that [German] Bunds had a poor day yesterday in spite of the slightly better performance of [UK] gilts and [US] Treasuries and in spite of significant weakness in global stocks,” says Steven Barrow, chief forex strategist at Standard Bank.
“Clearly this could be temporary. [But] if it were to continue, it would, at a minimum, make us wonder where overseas bond investors would go if they start to ditch all Eurozone debt.”
German Bunds ticked higher on Tuesday, nudging 5-year yields back down to 1.70%, but new data today showed consumer-price inflation across the 16-member Eurozone holding at 1.9% annually last month – delivering a negative real return to domestic bond holders.
Spanish government bonds again fell sharply this morning, extending yesterday’s worst 1-day fall since the launch of the Euro a decade ago.
Together with Spanish bonds, the yield on Italian debt today rose to a fresh post-Euro record above comparable German bonds.
Over on the equity markets, European stocks checked their plunge in early trade, but Asian shares closed sharply lower after ew data out of Japan – the world’s 3rd largest single economy – showed Labor Earnings growing less quickly than expected in Oct., while Vehicle Production and Construction Output both continued to shrink.
Short-term interest rates in the Chinese money-market jumped. The Shanghai stock market fell 1.3% to a 7-week low.
“We’ve seen good physical [gold] demand from China and India today, both from jewelers and investors,” says a Hong Kong dealer, speaking to Reuters.
Still the world’s No.1 gold consumer, Indian gold-buying during the autumn festival of Diwali is now having less impact on global gold prices than the Chinese New Year, which falls on Feb. 3rd in 2011, research from BullionVault shows. (Read about the shift From Diwali to Xia Nian here…)
China’s total credit supply for 2010 “is likely to reach 8 trillion Yuan,” said Liu Yuanchun of Renmin University’s School of Economics to the China Daily this morning, “exceeding the government target by 6.7%.”
“As things stand today, and given the tension prevailing in the market, interest rates have to be increased by another 200 basis points [2.0%],” writes Chinese Academy of Social Sciences economist Zhong Jiyin in the China Daily today.
Real interest rates – after inflation – are currently negative by 2.15% for Chinese cash savers, with shop prices rising at their fastest clip in more than two years.
“History tells us that almost all major economies go through deflation rather than inflation during their transformation from agricultural to industrial societies,” Zhong goes on, citing the United States from the 1860s to the 1900s.
“But China’s problem is inflation. And that makes it imperative for the government to pay more attention to the monetary policy.”
Beijing’s politburo, the State Council, vowed a harsher crackdown on “price violations” on Monday, after it imposed ceilings on a range of goods this month.
Adrian Ash
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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2010
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