In a relatively quiet trading day, the GOLD market rallied $25 after spending most of the PIT TRADING DAY attempting to break and set up a correction to the recent rally. Shorts ran for cover. WHY? Two stories that gave the rally a rationale:
2. A STORY IN THE NEW YORK TIMES “GROWING AIR OF CONCERN IN GREECE OVER NEW BAILOUT,” by RACHEL DONADIO.
The rumors of the FED extending “OPERATION TWIST” SHOULD NOT HAVE HAD THAT IMPACT FOR IT IS NOT AN ISSUE OF INCREASED LIQUIDITY BUT ONLY DURATION. The impact should have been a flattening in the 5/30 TREASURY SPREAD rather than the GOLD.
The story in the Times was of greater interest as it raised the issue of GREEK BONDHOLDERS BEING ABLE TO SEIZE GREECE’S GOLD RESERVES IF THE GREEK GOVERNMENT DEFAULTS. This is the first time this subject has been discussed but it certainly called into question the use of GOLD as collateral. Greece does not have a great deal of GOLD as its reserves equal 1% of its national debt. The article quotes a Ms. Katseli, former socialist labor minister who “was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and the future bonds issued will be governed by English Law and in Luxembourg courts, conditions more favorable to creditors.”
The sad fact of this story is that if Greece’s GOLD RESERVES are in play, why didn’t the Greek authorities just issue GOLD-BACKED BONDS and get some leverage? Just imagine investors bidding for GOLD-BACKED GREEK DEBT AND THE IMPACT IT WOULD HAVE ON GREECE’S BORROWING COSTS. IT SEEMS THAT INTERNATIONAL CREDITORS ARE WILLING TO CONSIDER GOLD AS A CURRENCY AND THUS STORE OF VALUE. HEY, IMF! GETTING ANY IDEAS ON HOW TO INCREASE YOUR LENDING POWER?
***The BRITISH POUND was the weak link in the currency realm as the BOE released its minutes and the Monetary Policy Committee (MPC) voted 7-2 on the 50 BILLION increase in the present QE program. The two nay votes were from members who wanted a larger increase of 75 BILLION. This perceived softness sent the POUND weaker on the currency crosses and the GILT markets rallied sending LONG RATES LOWER. The move in the POUND on such a nothing piece of news should be an alert about the impact of next week’s ECB release on the LTRO. Mr. Draghi, proceed with caution as the global markets await the size of the LTRO. The BOE and the FED have done the work to smooth the way for an aggressive ECB … the world waits.
***TODAY‘s 2/10 EURO YIELD CURVES: It seems that the ECB has begun buying Portuguese debt as the 2/10 curve in Portugal has been jumping wildly from inversion to positively sloped. Early in the day the curve was negative 30 BASIS POINTS but by day’s end it was 58 points positive. The ability of the ECB to affect the yield curves should not be underestimated and it is why the Italian bond futures are so volatile. CENTRAL BANK INTERVENTION IN THE DEBT MARKETS HAVE UNDERMINED THE MEANING OF VALUE … caveat emptor.