Are Central Banks Buying Printing Presses?

Gold and silver remain stuck in a range as Europe continues to keep investors waiting for the next headline.  Reuters reports, “Europe divided on Friday in a historic rift over building a closer fiscal union to preserve the euro, with an overwhelming majority of countries led by Germany and France agreeing to forge ahead with a separate treaty, leaving the EU’s third biggest economy Britain isolated.”  It is still unknown when more definite action will take place to address the debt crisis.  A new treaty could take several months to negotiate, and may even require referendums in some countries.

Although many expected European Central Bank President Mario Draghi to outline a plan for bond buying (quantitative easing), he did not deliver such a plan.  Instead, the ECB cut its benchmark interest rate by 25 basis points to match a record low of 1%. It also unexpectedly introduced new three-year loans for banks and loosened collateral criteria by making credit claims such as bank loans eligible and reducing the rating threshold on asset-backed securities.  However, the ECB offering three year loans by accepting less desired collateral still injects liquidity into the banking sector.  The major beneficiaries of increased liquidity are gold and silver.  As Gresham’s law explains, the bad money will force out the good.

Investor Insights: Will Gold Help Japan Sell Debt?

With the future of euro in doubt, some central banks in Europe have started preparing for a breakup of the eurozone.  The WSJ reports, “At least one—the Central Bank of Ireland—is evaluating whether it needs to secure additional access to printing presses in case it has to churn out new bank notes to support a reborn national currency, according to people familiar with the matter.  The central banks’ planning is preliminary, according to the people familiar with the matter. It doesn’t represent an expectation that the euro zone is headed for dissolution.”  Switzerland is also considering possible replacements for the euro to use as a currency peg.  Even though the euro may not collapse, preparations can be the difference between success or catastrophe.

On Wednesday, J.P. Morgan told clients they see less than a 20% chance of the eurozone breaking up, but should hedge against the possibility.  John Normand, J.P. Morgan’s global head of foreign-exchange strategy, explained the economic and financial impact of the eurozone collapsing would be worse than the implosion of Lehman Brothers in 2008.  Earlier this week, UBS also warned investors to hedge against the eurozone breaking up.  The bank stated, “I suppose there might be some assets worthy of consideration-precious metals, for example.  But other metals would make wise investments too.  Among them tinned goods and small calibre weapons.”

According to Bloomberg, gold traders are more bullish on the precious metal as it offers protection from the debt crisis and counter-party risk.  “Eighteen of 26 surveyed by Bloomberg expect the metal to advance next week, the highest proportion since Nov. 11. Holdings in exchange-traded products backed by gold rose 108.6 metric tons to a record from the start of October, the most since the second quarter of 2010, data compiled by Bloomberg show. The extra bullion is valued at $5.99 billion.”

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