Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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