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Euroland and The Gold, Silver Price Rebound

Commodities / Gold and Silver 2011 Oct 12, 2011 - 12:30 PM GMT

By: Jim_Willie_CB

Commodities

Best Financial Markets Analysis ArticleAn important reversal of focus, expectation, and direction has taken place in Europe. Put aside the sovereign debt mess that will not go away. It will not be fixed, despite all the effort and talk and deal making. They must prepare for a string of bank failures and a Greek default. Every solution executed or proposed or pending involves the same lunatic device of creating more debt or more money to solve a problem caused by too much credit creation and unchecked monetary creation. For 18 months the Euro had traded on the back of the European Central Bank monetary policy, on interest rate judgments and expectations.


To be sure, the PIIGS sovereign debt situation has dominated the news. However, that disaster has played out in the member nation bond yields, like Greek yields shooting toward 100%, like the bigger southern periphery nations jumping over the critical 5% level. During all the maelstrom of the wrecked bonds, arguments over bank bailouts, haggling over funding the stability facility, and political footdragging, the Euro had maintained a 140 exchange rate for a long time. The impetus for the rise from 130 to 147 in the Euro currency from the beginning of year 2011 had been the clear move by Trichet of the Euro Central Bank to break ranks with the US Federal Reserve. Outgoing chief Trichet hiked the official rate by 25 basis points several months ago, attempting to make distance from the USFed. He made defiant comments implying a reckless pattern at the USFed. He cited rising price inflation threats and the lack of desire to continue to stimulate on the monetary side. The rate hike was criticized widely for its direct impact on PIGS nations. Their mortgage rates and other related internal bank mechanisms caused damage to the southern banks. They were already teetering.

All changed at the end of August. The Trichet EuroCB responded to the Western plunge in stock markets accompanied by vivid economic slowdowns. Suddenly, Trichet indicated a greater emphasis on paying attention to growth issues. The profound bank distress grew into a contagion, as the big French banks came under the spotlight, also capturing his attention if not causing shock. Then suddenly Dexia had a near death experience, aided en route to the morgue. The EuroCB seems now trapped by two equally unsavory and undesirable policy directions. It had been giving all the signals of an official rate cut. But the European Central Bank did not cut rates last week, an event of extreme importance. Trichet cited intensified downside economic risks, that matched the Bernanke language of extreme economic weakness. The clumsy Euro Central Bank instead decided to announce another round of bank loans and massive bond purchases. While the bond plan is more of the same expansion of money, much bank backstop activity has curiously been US$-based, as the big European banks have a boatload of US$ obligations to meet. The ugly little fact in the last month has centered on how Wall Street banks have filled the void and extended bailout-like loans in the interbank market to big Euro banks. The harsh reality is that when Greece inevitably defaults, a string of bank failures will occur that hit Europe, London, and the US simultaneously. The great posturing is underway prior to the big event. Clear the smoke and dust, and the fact remains that the official EuroCB interest rate was not cut by 25 basis points. They did not even remove their hike from several months ago.

EURO CURRENCY REVERSAL NEXT

The FOREX market is tremendously leveraged and active. It trades off arbitrage of interest rates and their expected direction. The Euro has begun to rise. Just this week, it registered a 140 basis point rise on a single day. Today yet another big upward move has been recorded, as the Euro has risen 160 basis points more, touching the 138 level. Observe the reversal of the Euro currency decline. It has a thinly defended gap between 136 and 140 which will be filled. The reversal in underway. Momentum is building. Talk of the absent rate cut is loud and reverberating. The MACD momentum swing indicator shows a reversal in progress. The potential for FX trader profit is suddenly on the upside. The fundamental defense in the form of narrowing interest rate differential versus the USDollar did not materialize. The FX currency market is dominated by leveraged bond speculators who prey and trade off the differential.

Bankers across the Atlantic are actively printing money, buying bonds, and otherwise debasing their currencies. A big announcement by the Bank of England about their GBP 75 billion (=US$115 billion) infusion into the financial markets came in rapid fire after the Euro Central Bank left their benchmark rate at 1.5%. The ECB announced it will resume covered bond purchases and reintroduce important loans for banks. Massive futures contract bets had been placed that the Euro would fall versus the USDollar. Short covering has begun in earnest. But the justification from a pending expected rate cut did not happen. The reversal is in progresss, with some momentum. A shift is vividly clear in risk sentiment for the USDollar to weaken from here. It has made a run on Euro weakness, not US mainland strength. The American problems remain enormous and intractible.

EURO GOLD LOST SHINE

My gut told me the EuroCB would not cut rates. They cringe at the thought of following the American lead. They reluctantly cut rates back in 2009, knowing it would cause speculative problems and a rising Euro to damage German export trade. They defiantly hikes rates in very early 2011, angering the Americans by putting distance between them. They bristled at the Geithner appearance at the G-7 in Poland last month, for his hypcrisy and arrogance on urging an approach. The expected rate cut (that never happened) has been an important short-term crowbar to knock the Euro down 1000 bpts, from 142 to 132. My thought was that the Trichet ECB would avoid an official rate cut in a rising price inflation environment within Europe. We have seen a 500-bpt rise in the Euro so far, the process half done, fully expected and mentioned in private email exchanges last week. Curiously, very few economists expected a rate cut, but the 1000-point Euro decline was predicated on exactly such a rate cut. The EuroGold price pre-saged no rate cut. The pause is clear. The EuroGold price could easily fall back toward the 1100 Euro mark, where it was before the big Euro currency decline. Its foundation has vanished. But a Euro rise and a big Gold rise could keep the EuroGold price steady near the 1200 level.

The US$-based Gold price will benefit in opposite manner to the EuroGold price. The Gold price is prepared to rise in US$ terms, perhaps powerfully so. It will fall in Euro terms. Notice the EuroGold price fights below the 50-day moving average. Watch to see if it crosses below the 100-day MA soon. The MACD is close but has not crossed over. Look for it to dance and kiss but not cross above in bullish terms. Notice the Gold price in US$ has bounced off the 1600 impulse bottom.

ENGINEERED GOLD DECLINE HALTED

This article would be remiss not to point out that history is being made. The COMEX has decided to raise margin requirements when a falling price is occurring, for both gold & silver. Normally, the opposite is the case. Notice no USTBond margin hikes, even though an asset bubble. If truth be known, the damage done to the Paulson Fund had a big hand in knocking down gold. Motive is painted on the walls. Policy is to tarnish the precious metals as the global monetary system continues to crumble, as the USGovt deficits head toward $2 trillion annually, and the USEconomy enters a recognized recession along with Western Europe, before renewed stimulus is attempted. With all the destinations staring the bankers and politicians in the face, they wanted the Gold & Silver prices to be pushed down. The next upsurge will be one for the history books. With new money heading to fill holes in the bank bond bailouts, the recapitalization of numerous banks, the economic stimulus, and the government debt monetization (led by the US), the debasement of major currencies will be astounding. The Gold & Silver prices will make strong new highs repeatedly.

The Silver price is ready to bust north too, but in a more emphatic display. Its decline was led by the Gold decline, but was also pushed by the industrial demand card from a slower economy. The extreme silver supply deficit has not gone away. Neither has the huge silver coin demand from various mints around the world shown any sign of relenting. The Silver price has a MACD reversal in progress. The 30 breakout level from the final months of 2010 has been defended. The potential for a powerful reversal to fill the obvious gap from 32 to 40 is painted loudly for all technical traders to see. No resistance is presented. A pit stop at 36 will come, enough for a cup of coffee.

By the way, Operation Twist is a massive deception to enable foreign creditors to dump USTreasury Bonds. The hallmark of Quantitative Easing has turned toward deception, lack of transparency, and devious cunning scheming defense of the USDollar by whatever means. The past QE, QE-Lite, and QE2 kicked the USDollar in the teeth, knocked it down in value, and caused an extremely disruptive rise in the cost structure for the entire world. It was hardest felt in food prices. The USFed has been given direct blame across the world, complete with harsh criticism. So the monetary easing programs instead turned more secretive, as Global QE became the policy. Check out the Japanese and Swiss central banks, even the British, as they are all involved in active monetary growth. A queer fact never received much attention late last year. The Irish increased their Euro money supply over a four month period by a staggering amount. They defied the Euro Central Bank since unapproved. Annualize by a 3x factor, then compare to the US by a 50x factor (accounting for population) and the Irish increased the money supply by a ripe $3 trillion annual equivalent.

Conclude that Global QE is here in earnest, uniformly and powerfully so. If all central bank outpost nodes participate, the USDollar will not fall much, if at all. The central bankers are willing to wreck the global economy in order to contain the cost structure from demand destruction, a truly dangerous ploy since they risk toppling their own subservient collusive big banks. The October Hat Trick Letter provides details on the sneaky reality behind the Operation Twist. Foreigners bailed out, and might have purchased some US stocks. Doing so would keep the flows from re-entering their home currencies and lifting their exchange rates, a step that would lower the US DX dollar index in the process. The secondary motive behind USFed action is to avoid another strong USDollar decline, even though the United States is the biggest PIIGS nation of all on debt ratios of any measure.

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by Jim Willie CB
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