Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Ruble Takedown Exposes Cracks in Putin’s Defense - 20th Dec 14
Oil Drilling Our Way Into Oblivion - 20th Dec 14
Stocks Bull Market Resumes - 20th Dec 14
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14
Torture, Terror And Elite Schizophrenia In The UK - 16th Dec 14
Eurozone Conflict Will Bring a Major Stocks Buying Opportunity - 16th Dec 14
Viewing Russia From the Inside - 16th Dec 14
Gold and Silver Stocks Bottom - Are We There Yet? - 16th Dec 14
The Financial Industry Pigmen Win Again - 16th Dec 14
Crude Oil Price Epic Blowout - 16th Dec 14
Asian Stocks Markets: Sand In The Gears Of The Bull Market - 16th Dec 14
U.S. Dollar Trend Forecast 2015 - Video - 16th Dec 14
Silver Price Bottom? - 15th Dec 14
Gold Price Base Building Bullish Pattern - 15th Dec 14
Stock Market Probable Pop-n-Crash Today - 15th Dec 14
Stock Market Time for a Bounce - 15th Dec 14
Stock Market Euphoria: The Mother of All Ponzi Schemes - 15th Dec 14
Gold - The Weight of Time as Trend - 15th Dec 14
U.S. Dollar Collapse? USD Index Trend Forecast 2015 - 14th Dec 14
The Rushing Stocks Bear Market and How to Prepare - 14th Dec 14
Gold and Silver Dreaming of a White Christmas - 14th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

Rising Eurozone Yields Will Push Gold Towards the Monetary System

Commodities / Gold and Silver 2012 Jun 19, 2012 - 08:02 AM GMT

By: Simit_Patel

Commodities

Best Financial Markets Analysis ArticleA trend I've been focusing on lately are the signs we are seeing of gold returning to the monetary system. Consider the signs:

1. Central banks continue to increase their purchases of gold, having become net accumulators of gold since 2009. The central bank of Kazakhstan purports to have 20% of its reserves in gold.
2. Banking standards from Basel III, an international banking institution, may be changing so as to give banks that hold gold a higher score.
3. The European Redemption Pact, an agreement to consolidate excess debt in the Eurozone, is allegedly discussing the idea of issuing Eurobonds that would be partially backed by gold.
4. In the United States, states like Utah are moving to restore gold's status as an officially recognized form of money.


What all these events are telling us is that faith in the fiat money system of the world, in which all money is loaned into existence, is breaking down -- as it has repeatedly done so many times before when such monetary systems were attempted. The market does not trust this type of money, and is choosing gold instead, as gold is a form of money whose supply is difficult to control and bears no intrinsic relationship to debt.

And so, one development I'm watching particularly closely because I think it will send gold even further towards the global monetary system are yields on bonds of member nations in the Eurozone. The higher yields go for the individual countries in the Eurozone, the more expensive it becomes for them to borrow from the private market -- and the more likely it becomes that they won't be able to borrow at all. Consider the yields the market is demanding on 10 year bonds from the following nation-states in the Eurozone:

Spain: 7%
Italy: 6%
Portugal: 10.5%
Greece: 26.2%
Ireland: 8.2%

Of course the problem these countries face is nothing new, and has received much attention from the financial media. What is less discussed but perhaps more important, though, is that Germany -- the stronghold of the European Union that is often looked to as the country that can essentially bailout the others and preserve faith in the Euro -- is also starting to see its yields rise. See the chart below.

For a more dramatic effect, let's zoom in to the 30 day chart:

Now, it may be a bit too early to draw any meaningful conclusions from the uptick in the yield on Germany's 10 year bonds; this could just be normal market volatility. But this has been a fairly strong move, and its timing is interesting -- right during the big Greek elections. Is the market worried that Germany will be called upon to pay for Greece's bills? If so, is the implication of rising yields that the market does not view this favorably and will charge Germany for paying Greece's bills?

I think that at some point, if not now, that is the way the market will view the situation. And that is part of why the EuropeanRedemptionPact is so important. If accepted, the plan will basically roll up all the excess debt of these nations into a single bond -- a Eurobond -- that would be managed by Germany. Countries whose excess debt, defined as public debt beyond 60% of their GDP, is rolled up into the Eurobond would need to put up 20% collateral of the amount of debt they shrug off to the Eurobond. And, most importantly, gold would be an accepted form of collateral.

So, what is essentially being proposed as the solution to get the world to lend money to nation-state governments in the EU is if governments are willing to put up gold as collateral. This creates a world in which the governments themselves have an incentive to see a very high gold price, as the higher gold is valued by the market, the less gold they will need to put up as collateral. To put it simply, if the Euro is to remain a viable currency and the European Union a viable supranational government, something akin to a gold-backed Euro is needed. 

Now there is some suspicion surrounding this proposal, with concerns that it is basically a ploy to further consolidate power and gold in Europe. Indeed, I find such concerns to be reasonable and warranted. But what is the alternative? If Greece, or any of the other countries whose yields have exceeded the critical 7% mark -- the point at which the interest burden makes public debt too difficult to take on -- exits the Euro voluntarily or through expulsion, it will need to launch its own currency. And how will it gain the credibility and trust needed to attract capital to store their wealth in this new currency? In my opinion, a currency that is relational to gold and possibly silver is the answer. Indeed, Hugo Salinas-Price suggested that Greece leave the Euro and create a drachma that can be redeemed for silver.

In sum, it is clear that yields on public debt are rising throughout the European Union. Rising yields is creating an inability for member nations to continue borrowing to finance their government spending. Whether this problem is rectified by aggregating debt and backing it with gold or a splintering of the Euro that leads to multiple currencies employing a monetary policy in which the currency is relational to gold or silver.

By Simit Patel
http://www.informedtrades.com

InformedTrades is an online community dedicated to helping individuals learn to trade the world's financial markets. Members earn prizes for sharing their knowledge, and the best contributions are compiled into InformedTrades University, the largest collection of free organized
learning material for traders on the web.

© 2012 Copyright Simit Patel - 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.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014