Europe's debt crisis: Expect more trouble

Image via WikipediaThe bailout agreement reached this summer to stop Europe's downward spiral did not even buy time for its sacrosanct August holidays. Within two weeks of the pact, a reluctant European Central Bank was forced to step into the breach and buy Italian and Spanish bonds to counter the market's assault. Leaders had agreed that Europe's bailout fund could buy sovereign bonds in such a situation, but the deal has not yet been ratified by national legislatures, and in any case the bailout fund doesn't have sufficient resources for the job. Inevitably, the focus turns to the country next on the firing line: France, the eurozone's second-largest economy. You can expect the period ahead to oscillate between stagnation and the specter of chaos.

What has been lacking so far: action that's a step ahead of the markets. Each European sovereign crisis has had a drawn-out run-up. Time has been wasted defending the indefensible before giving in to the inevitable. In these periods, yields for the majority of European government bonds have increased dramatically without being fully restored after a bailout. That increases the cost of borrowing. Solutions that might have worked a few months earlier become insufficient as the contagion hits more countries. As a consequence, a wider, more expensive response is required. More...

Gold is breaking out in all currencies

Neil Charnock
We have been looking at global trends and the debt markets very carefully this year so as to remain prudent about our views on the direction of gold and the Australian gold sector. This may seem like a long bow to draw however the thigh bone is connected to the knee bone when it comes to global markets and capital flows.

We specialize on coverage of gold and the Aussie gold stocks that make up the Australian gold sector which is one of the important gold share markets due to our high level of gold production and another key reason I will get to shortly. Another important part of our work is on the currencies due to the importance of the AUD to our gold sector and also for our international clients. We have even taken on a leading Fx broker as an advertiser due to the importance of Fx for international capital flows at this point in history.

Our thesis for this year has been one that includes continued trends on global markets on the back of stimulus capital along with increasing sovereign debt trouble and contagion which will (and has) produce fear. We have seen this as a positive environment for gold along with extreme volatility and distortions in the currencies and see no reason to change that view at this stage.

Gold is breaking out in all currencies and I forecasted a rise to the US$1180 area a week or so back. It has not quite made that target and may not, perhaps it will overshoot. After hitting record highs in Euro terms the gold price consolidation of the past 4.5 months in USD terms appears to be drawing to an end with only a few weeks left before we see lift off. I am expecting one last dip in the USD POG (price of gold) which will be short lived and reasonably shallow. The US$1100 level is not out of the question on this hypothesised pull back. More...

Sprott Discusses The Global Ecoonomy

Tyler Durden
Eric Sprott was discussing the global macro picture earlier in an interview with Bartiromo. Here are his key observations:

I still have a deep, deep concern about the leverage in the banking system. I look at the inability of governments who are spending vast amounts of money to generate much growth in GDP. I can give the example of running a $1.5 trillion deficit last year and GDP goes up $200 billion. So we are not getting much bang for the buck but we still owe the buck at the end of the year. I also worry about what's going on in China. The Chinese government has asked the banks to cool down their lending, the latest data in March show that lending has gone down from $300 billion per month to $100 billion. That's $2.4 trillion a year less. And obviously it has to have an effect on their economy as the lending of $2 trillion did positively last year. When you look back at China in 2009, they had a $4 trillion economy, they lent $2 trillion to people, they had a $600 billion stimulus: those should generate some GDP growth. I am not even convinced that 10% growth which would be $400 billion is a good response to all the measures that were taken.

Sprott then goes on to discuss something very dear to gold holders: physical gold and specifically his gold trust, the PHYS (Sprott Physical Gold Trust) which competes with SPDR's GLD. The main difference, as most people know, is the PHYS actually has real, auditable physical gold to back the underlying, not to mention the 15% vs 28% tax differential. Sprott goes on to defend why gold, which has been the investment of the decade, looks even better today than it has ever looked:"We have sovereign risk on the economic risk today, that we didn't have before. As I look at the problems in Greece and I see poeple take $4-8 billion out of the banks, where do the people put that currency? It is obvious that lots of them putting it into gold."

Sprott also loves silver, which he thinks will act better than gold as there is not as much silver inventory in the world as there is gold inventory.

The ultimate catalyst for PM price explosion "We'll just see how long those governments' people will continue to buy their sovereign debt. When they stop buying that sovereign debt, then the reason why we are liking gold will become more and more apparent." More...