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Will Gold Help Japan Sell Debt?

Commodities / Gold and Silver 2011 Dec 08, 2011 - 02:09 AM GMT

By: Eric_McWhinnie

Commodities

Earlier this week, Standard & Poor’s placed Germany, France and 13 other eurozone nations on negative credit watch, saying “continuing disagreements among European policy makers on how to tackle” the region’s debt crisis risk is damaging their financial stability. Furthermore, S&P warned that the European Financial Stability Facility may lose its top credit rating. “We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on credit watch, on one or more of EFSF’s guarantor members,” S&P explained. Now, more steps are being considered by the European Central Bank in order to stimulate lending.


Credit grades may be lowered by one level for Austria, Belgium, Finland, Germany, the Netherlands, and Luxembourg, and as many as two levels for the other government if the summit does not yield a satisfactory result, S&P said. If S&P does downgrade all the nations, more than $8.1 trillion of government debt would be affected.

In an effort to boost confidence and stimulate lending, the ECB may seek to expand the eligibility of collateral for ECB loans by loosening rules regarding the use of asset-backed securities. Bloomberg explains, “The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight Europe’s debt crisis.” However, other nations are taking other methods to boost confidence into financial markets.

In August, I discussed how Royal Silver Company, in an effort to raise capital, offered bonds that entitled the holder to receive a one ounce coin of silver each month. The principal was still paid back in cash, but the silver coin acted as interest and even provided a hedge against a devaluing dollar. Apparently, Japan has decided to take a page from Royal Silver’s playbook.

In order to increase demand for government debt, Japanese Finance Minister Jun Azumi will be offering a special incentive for investors that purchase more than 10 million yen ($129,000) in reconstruction bonds. Bloomberg reports, “Individual investors who hold the bonds for three years will be eligible for a gold commemorative coin valued at 10,000 yen. At 15.6 grams, (0.55 ounces), it would be worth about $948 based on prices for the precious metal. Only a limited number of coins will be issued, the Finance Ministry said in a statement. Silver coins weighing 31.1 grams valued at 1,000 yen will be distributed to those who own more than 1 million yen of the bonds, the government said. The coins will be offered for debt going on sale in March.” Investors will also receive a thank-you note from the minister.

Considering Japan’s massive debt load, it will take more than 15.6 grams of gold or 31.1 grams of silver to significantly increase government debt demand. In a recent letter to investors, Kyle Bass describes Japan’s dreadful debt situation. He writes, “It is indisputable that Japan has the worst on balance sheet debt burden in the world (roughly 229% of GDP). Japan has the worst debt dynamic (total debt outstanding as a multiple of central government revenues) of any country in the world (at a staggering 20X). They now have more people leaving the workforce than entering. Soon they will have more people dis-saving than saving.” While a few grams of precious metals and a thank-you note is a nice gesture, it will not resolve the solvency problems facing Japan or other nations.

For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.

By Eric_McWhinnie

http://wallstcheatsheet.com

Wall St. Cheat Sheet : Only days after the S&P 500 crashed to the depths of hell at 666, the Hoffman brothers launched Wall St. Cheat Sheet: one of the fastest growing financial media sites on the web. Like a samurai, our mission is to cut through the bull and bear shit with extraordinary insights, a fresh voice, and razor-sharp wit. We provide the highest quality education and information for active investors, financial professionals, and entrepreneurs.

© 2011 Copyright Eric McWhinnie - 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


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