Currency Wars Are Driving Gold and Silver Higher

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Over the weekend, talks between Greece and its private-sector creditors over debt write-downs were unsuccessful.  Charles Dallara, the creditors’ lead negotiator, left Athens on Saturday as differences remained over the terms of new Greek bonds.  Although a deal was not agreed upon, the market is signaling high expectations for a deal to be completed soon.

On Monday, the U.S. dollar index, which places the greenback against a basket of six foreign currencies, declined from 80.34 to 79.65.  It is the first time in 2012 the dollar index declined below 80, which had been acting as support in previous months.  With the euro holding 58 percent weight in the dollar index, it is responsible for much of the dollar’s decline today.  The euro climbed to $1.3044 on Monday, it’s highest level since December.  In a press conference Monday morning, French Finance Minister Francois Baroin said, “A voluntary restructuring of debt held by private investors seems to be taking shape.  We are determined to support Greece the time necessary for it to put in place reforms and for them to produce their effects.”

The recent hopes for a Greek deal and the decline in the dollar has given a boost to precious metals.  Gold is near six-week highs as it closes in on $1,680 per ounce, while silver prices have surged 15 percent this year and currently trade near $32.  Furthermore, international agreements and sanctions are reminding investors of the significance of precious metals in the global financial system.

Investor Insight: Inflation Concerns Remain as Gold and Silver Climb Higher

Earlier this month, Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade.  This came after Iran replaced the dollar in its oil trade with India, China and Japan, reported Iran’s state-run Fars news agency.  Today, European Union governments have agreed to fire back and place a ban on all new contracts to import, purchase or transport Iranian crude oil.  Europe is Iran’s second-largest oil customer after China.  Reuters explains, “EU countries with existing contracts for Iranian oil and petroleum products will have until July 1, 2012 to complete those contracts.  The sanctions follow fresh financial measures signed into law by U.S. President Barack Obama on New Year’s Eve, and will mainly target the oil sector, which accounts for some 90 percent of Iranian exports to the EU.”

Although the oil sector is a large target, there is another important sector being targeted by the sanctions.  EU governments also agreed to freeze the assets of Iran’s central bank.  More importantly, it placed a ban on all trade in gold and other precious metals with Iran’s central bank and public entities.  “Today’s decisions target the sources of the finance for the nuclear program, complementing already existing sanctions,” the EU explained.  While the sanctions may be targeted at Iran’s nuclear financing, the move serves as a reminder to investors that precious metals are alternative reserve currencies used in the absence of the U.S. dollar.  Recent data shows that Russia and China are likely to continue business with Iran outside of the U.S. dollar, which will help support gold and silver prices.  In addition to trade agreements, Russia has reduced their U.S. Treasury holdings over 50 percent from October 2010, while China has reduced their holdings to the lowest level in over a year.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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