Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
Theresa May Declares War on Immigration - Conference Speech Full Transcript - 6th Oct 15
Is Russia Plotting To Bring Down OPEC? - 6th Oct 15
Target Date Funds As Aid In Retirement Investment Portfolio Design - 6th Oct 15
Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - 6th Oct 15
Redesigning Internet and Facebook to Explore Their Full Potentialities... - 5th Oct 15
Nightshades Curb Your Enthusiasm - 5th Oct 15
U.S. Recession Watch, High-Yield – Rising Defaults - 5th Oct 15
The Social Challenge to Find Humanity in Capitalism - 5th Oct 15
Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference" - 5th Oct 15
Gold Rose 2.2%, Silver Surged 5.4% After Poor Jobs Number On Friday - 5th Oct 15
Gold, Silver Precious Metals: a Critical Week Ahead - 5th Oct 15
Stock Market Correction Still in Force - 5th Oct 15
Gold Price Change in Character - 5th Oct 15
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

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


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

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 - 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

Biggest Debt Bomb in History