Is Gold Being Sold To Pay For Sovereign Debt?
Bears of the yellow metal had the upper hand this week, as prices eroded from last week’s closing price to post a fall of 6.5%, closing at 1598.45 on Friday.
ETF’s were hit too, as net outflows hit record levels during the week. On Thursday, the SPDR Gold Trust (GLD) saw gold bullion stocks held to back shares fall to 1280 tonnes. The 15 tonne decrease on the day was the largest downward movement since August.
The problem for gold is linked directly to the problems of the Eurozone countries and the massive debt they are carrying and financing. There is now a feeling that Eurozone sovereign ratings may be cut further by the major ratings agencies, Standard and Poors and Fitch, as the ramifications of the agreement struck last week continue to sink into market watchers’ thinking. The agreement calls for a cut in almost all countries budget deficits, which will lead to a cut in governmental spending, a lo0ss of jobs, and a decrease in economic actibity across the region. It is highly unlikely that European countries, already embattled with lower growth and political unrest, will actually see this so called solution through.
Last week Standard and Poor’s placed every Eurozone country on Creditwatch negative, stating that Eurozone nations had not demonstrated the ability to act collaboratively toward a lasting solution to the region’s financial problems.
In response, France has tried to deflect the ratings’ agencies microscopes toward Britain, saying that its non Euro neighbour has “a bigger deficit, as much debt, more inflation, weaker growth, collapsing bank lending”. No positive argument, in politics, usually means the need to attack a political opponent. This is clearly the attitude that France is displaying. Expect a downgrade of French credit ratings soon, but don’t expect Britain to remain immune: much of what the French finance minister, Francois Baroin said is, in fact, true.
European C3ntral Bank President, Mario Draghi, has said that the ECB’s program of buying European debt is “neither eternal nor infinite”. This is clearly signalling that an end to ECB support for Eurozone sovereign debt is in sight.
Europe is imploding under the weight of its debt, and gold has suffered in the crossfire. It may come to light that Eurozone countries, in an effort to raise money to pay their way in the world, have been selling gold reserves. Watch this space. As with any forced selling of investments, this will –and possibly has already –lead to a depreciation of price before the selling is finished and out of the way. Look at Gordon Brown’s sale of Britain’s gold reserves in the nineties at $290 an ounce for evidence of this.
Meanwhile, in the USA, voting was taking place in the House of Representatives on Friday to agree an extension of spending that will avert a closing of government agencies. July/ August all over again, though quieter this time?
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