Chavez’s gold grab prompts dash for physical

2011-AUG-23

Yesterday saw high volatility on world stock markets, as concerns over the health of the US banking sector sabotaged an early rally in US stocks. WTI crude rose, as did broad commodity indices, with an increasing number of traders expecting Federal Reserve Chairman Ben Bernanke to announce some form of stimulus measure in his speech at the annual gathering of world bankers at Jackson Hole, Wyoming, this Friday. An expected pickup in Libyan oil production pushed the Brent crude price lower, however.

Unsurprisingly given these rumours of additional Fed devaluation efforts, the US dollar remains moribund – with the Dollar Index continuing to range trade between 73.5 and 74.75. As with the geopolitical turbulence prompted by the Arab Spring earlier this year and the economic fallout from the Japanese tsunami in the same period, the lack of safe-haven bids for the greenback remains notable. In the past, such market turbulence would likely have sent traders scurrying for dollars – but not this time.

Given the slow-motion sovereign debt train-wreck in Europe, people might also have expected the euro to suffer in relation to the dollar. This has turned out not to be the case. In comparison with the Fed and the Bank of Japan, the European Central Bank has been running a relatively tight ship in terms of monetary policy – to the extent that the money supply in Italy and other troubled eurozone nations is collapsing. Thus, the euro has not sold-off against the dollar – despite the much-publicised debt problems in the “PIIGS” (Portugal, Ireland, Italy, Greece and Spain).

The gold price reached a new nominal high of $1,913.50 in Asian trading today, while silver, platinum and palladium all also recording gains. Gold has been propelled sharply higher in recent trading sessions by the news that Venezuelan strongman Hugo Chavez plans to repatriate Venezuela’s gold holdings from banks in (mainly) the UK and the USA. Given that the “physical market” in gold is approximately 100-times the size of the amount of actual metal by which it is purportedly backed, this is raising concerns of exactly the kind of dramatic short-squeeze that GoldMoney contributor Alasdair Macleod warned about in an article for this website a few months back.

Things could be about to get very interesting in the gold market.