German debt problems

2012-JUL-06

Somewhat counterintuitive action in the precious metals markets yesterday, with gold and silver coming under selling pressure despite news of easing from a trio of major central banks. As expected, the Bank of England announced a further £50 billion of quantitative easing yesterday (the UK’s own “QE3”), which will bring the BoE’s total QE since 2008 to £375bn.

Elsewhere, the European Central Bank and the People’s Bank of China cut interest rates. The ECB cut its short-term lending rate to a record low of 0.75% – down from 1.0% – while the PBC announced a 0.31 percentage-point cut in its one-year yuan-lending rate, to 6% (which seems like a crazily high figure in contrast with the rock-bottom rates in the West and Japan).

Gains that might have been expected in gold following these moves were more than offset though by gains in the dollar. The US Dollar Index closed close to 82.90, its highest finish since early June. The most actively traded Comex gold contract, for August delivery, lost 0.8% over the session – settling at $1,609.40 per troy ounce. The other precious metals had a weak day as well, with silver falling back below $28.

Changing tack slightly, Detlev Schlichter has an interesting article out in CityAM arguing that Germany – far from being the virtuous, thrifty, economic powerhouse it is so often caricatured as in the media – is in fact different to Greece and Spain in “speed and degree only”. He comments that Germany’s generous welfare state is bankrupting the country, while its new eurozone bailout commitments means a bill worth 8% of the country’s GDP. In his words: “Like most other ‘mature social democracies’ Germany is slowly but surely going broke.” As Detlev says, this same point applies to pretty much every country in the western world (and of course, Japan). Slowly but surely the bill is coming due for all of us.

As far as precious metals and mining shares are concerned at the moment, John Lee of Prophecy Platinum sums up the situation well:

“I am reminded of two old famous adages: never catch the falling knife, and a market bottom is only known in hindsight. For me, successful investing means buying 20% from the bottom and selling 20% from the top. If we are not currently 20% from the bottom, I'd say we are darn near.”