Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15
The Hottest New Place to Find Stock Dividend Income in Q2/2015 - 15th Apr 15
How to Escape the Pensions Squeeze - 15th Apr 15
Water Crisis Game Changing Water Revolution - 15th Apr 15
The Drying of California - Corporate Farms Control of Water - 15th Apr 15
OPEC Going Broke, Dumping U.S. Dollars. Is That Good Or Bad? - 15th Apr 15
OPEC Just Confirmed It’s Losing the Oil War - 15th Apr 15
Four Uranium Companies Poised to Profit from the Growth of Nuclear Power - 15th Apr 15
Stock Investing Tread Softly… and Carry a Big Risk-Management Calculator - 15th Apr 15
Crude Oil Price Technical Outlook - 15th Apr 15
Important Bitcoin Price Action - 15th Apr 15
UK House Prices, Immigration, Population Growth and Election Forecast 2015 - 15th Apr 15
Peter Schiff on U.S. Dollars, Drachmas and Debt - Video - 14th Apr 15
The Ultimate Middle East Dilemma: Time For Us To Stop Intervening? - 14th Apr 15
Greece Debt Default and Drachma By End of April? - 14th Apr 15
Coming to Terms With the American Empire - 14th Apr 15
The Ball is in the Stock Market Bulls Court - 14th Apr 15
Tech Stocks Bubble: Different this time? - 14th Apr 15
Stock Market Sixth Sense - 14th Apr 15
Separating Gold and Silver Stocks Saints from the Sinners - 14th Apr 15
Conservatives Bribe Labour Voters by Extending Right to Buy to Housing Association Tenants - 14th Apr 15
Stacking Silver = Simple Solution - 13th Apr 15
Why Markets Ignored Weaker Payrolls - 13th Apr 15
Tory Attack on Ed Milliband Backfires as Labour Takes Opinion Polls Lead - 13th Apr 15
A "Digitalized" Stock Profit Play Mr. Spock Would Love - 13th Apr 15
New Credit Crunch Underway: Can Recession Be Far Behind? - 13th Apr 15
Western Interest in Gold Continues to Decline - 13th Apr 15
Stock Markets Breaking Out Worldwide - Buy the Dips Ride the Trend - 13th Apr 15
Silver Price set up to get Whacked Again - 13th Apr 15
Gold Price Dome Cap, Fall Below $1000 Likely - 13th Apr 15
Stock Market Accumulation or Distribution - 13th Apr 15
BLS Economic Propaganda, Truth – The Cure for Cognitive Dissonance - 12th Apr 15
A Case for Monetary Independence - 12th Apr 15
Drought and the Failure of Big Government in California - 12th Apr 15
Stocks Bull Market Continues - 11th Apr 15
Why the American Consumer Will Never Be Back - 11th Apr 15
End Of Islam, Hinduism And Christianity And Rise Of The Age Of Humanism, Spirituality And The Universal God - Sanadhana Dharma - 11th Apr 15
Gold And Silver Nothing Of Substance Going On. Fiat “Dollar” Controlling? - 11th Apr 15
The Most Dangerous Financial Headline I’ve Seen Since 2008 - 11th Apr 15
Alibaba Pggybank Investment Will Make You a Millionaire - 11th Apr 15
Ghosts In The Machine - Population Growth vs Food Production - 11th Apr 15
Gold-Futures Short Covering Rally - 11th Apr 15
Is Bitcoin Price Going down Some More? - 11th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

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.


© 2005-2015 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