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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Euro Breakdown Bodes Well for Commodities

Commodities / Commodities Trading May 11, 2011 - 05:21 AM GMT

By: Dr_Jeff_Lewis


The world is entering another financial crisis spurred first by debt and secondly by weak currencies.  Recently, Greece has reached tipping point in its austerity measures, hoping that the European Union led by German policy makers will send bail out dollars their way.

The failure of the Euro is well documented.  While the United States has problems in culling back its massive deficits, at least it can fool the markets temporarily with its access to the printing press.  In Europe, there is only one central bank for many national governments, and most aren’t too keen on using the presses for Greece’s benefit.

ECB Restless

The European Central Bank is growing restless.   Some members feel as though a bailout may be necessary to save the Euro.  Some members, such as Jean-Claude Trichet, the ECB chief policymaker, have said the opposite—the central bank must tighten in order to create recovery.

The ECB has forecast future rate hikes to reduce total inflation.  In April, rates were raised by 25 basis points to 1.25 percent.  That amount, however, is still well under the necessary rate of interest.  Inflation in Europe is officially measured at 2.8 percent per year, meaning it is still possible for bankers to borrow at less than half the rate of inflation.  Don’t you wish that you could borrow money (or anything, really) for less than the cost of depreciation? 

Future rate hikes are uncertain and perhaps impossible.  Greece recently awoke to a cut in its credit rating to BB-, making it one of the few “brand-name” countries to sell debt at junk bond status.  The cost of debt service is exponentially higher than three years ago, and the market for credit default swaps—insurance against default—rose to 1375 basis points, or 13.75% per year.  If Greece wants to borrow money, they’ll have to pay at least 13.75% per year just to provide adequate risk-coverage.  Even quality European bonds are paying for the crisis, with their CDS coverage now costing just under 1% per year.

Silver’s Success

In recent days, the Euro has been getting slammed against all currencies, but most importantly the dollar, after Greece’s budget troubles resurfaced.  Generally, the Dollar and the Euro are considered safe haven currencies, and they are popular reserve currencies around the world.  To see the Euro weaken against the dollar, especially considering the carry trade implications, tells us one thing: the Euro is on the brink.

Investors holding Euro-denominated assets have done well in recent years against the dollar, but to what end? 

Eventually, the realization for institutional investors, those who are most active in the currency markets, is that it will be only the monetary metals that can save their holdings.  The European Union is strained, yields are lower than inflation, and most global currencies face the same fate.

The commodities markets are one of the few areas where investors can safely store their money, either in gold, silver, oil, or a myriad of other products which, unlike world currencies, have appreciated at rates greater than inflation.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Finn Puklowski
11 May 11, 15:12
Im sorry

I'm sorry, but is this not just the movement of capital in the face of the end of QE2 back to the U.S dollar?

Speculators have been bending this market back and forward pricing in these huge trends.

Now we know Europe is on the chopping block, but really. Resurfacing the death to the Euro argument right when it starts to turn back down (and the us up).

Watch precious metals for your indicator. If they and commodities drop off, the US dollar increases and the Euro decreases. This is not an all time trend just recent.'

Regards. Finn

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