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Last updated: September 16, 2012 7:39 am
Let’s face it: for most investors, and the politicians to whom they contribute, speculative excess fuelled by irresponsible monetary policy is a lot of fun.
All my serious minded friends, with their references to the Fall of Rome and the German inflation of 1923, keep missing out on revivals of hope, bear market rallies, and great trades.
Not just outrageous gambles such as GDP warrants attached to Argentine or Greek bonds, but respectable, plain vanilla long positions such as buying beaten-up European industrials.
Defending the value of Peugeot’s credit or the price of its stock seemed a reach to some back in late July, for example, but the stock is up more than 20 per cent since then.
Eventually, though, the meteor does hit the dinosaurs, including the perfectly innocent herbivores.
In anticipation of that, the price of gold in currencies seems to be going into a years-long swing to the upside. The rationale for that, according to every gold bug investment letter and telephone salesperson, is that the central banks’ quantitative easing will lead to hyperinflation and warp-speed devaluation. So how many American Eagle gold coins can I put you down for, Mr Chump? There will be a premium to cover the cost of minting and shipping, of course, but that’s a small price to pay for peace of mind, isn’t it?
The more serious, chin stroking, highly educated bears, say that the capacity for back-up sovereign financing through the European Financial Stability Facility, and the now-certified-constitutional European Stability Mechanism is just too small to meet any “sudden stops” in the market for financing Spain and Italy, even with the effective leverage offered by Mario Draghi’s super-bazooka of ECB Outright Monetary Transactions.
While talk of sudden stops and Spanish collapse has moved from prescient to dated in the past two months, given the chronic bipolar disorder of European markets, it will come back.
And while it is true that the ECB has successfully awarded itself all the extraordinary powers it needs, there is that little matter of OMT being subject to “strict conditionality”.
The term remains undefined, and it won’t be defined until, say, the Spanish government has to actually negotiate a new programme. Now that looks like a next-year phenomenon. Whenever a “memorandum” or programme is published, the German and Finnish public’s ideas of how many real resources they feel like transferring to Spain’s creditors may turn out to be different from the ideas of the ECB and the Spanish government.
After all, when you add up all the Spanish bank debt that needs to be rolled forward, Spanish preferred stock holders who want to be paid in full, and continuing financing requirements of the Spanish government, OMT and ESM may look rather smaller than they do now.
Maintaining political support will probably turn out to be a much more difficult problem than worming something through a constitutional or European court.
So, those betting on re-divergence of European sovereign credits will have their day again. I suspect, though, that it will be a relatively short day. It’s not that there won’t be continuing gaps in competitiveness, and failures to effect structural reform. There will. It’s just that it won’t be easy to use those as the basis for short-selling Spain or Italy, or just getting your money out, because capital controls will be put in place, and rather more easily and quickly than most market people think. Those controls will make it possible for peripheral banks and governments to unilaterally extend the terms, and soften the conditions, of their bond debts.
This is where the growing European demand for small gold bars comes in. Back in April, I wrote that while the precious metals refiners had been gearing up to make more 100 or 500 gramme gold bars, instead of the 400 ounce bars that are held by the gold exchange traded funds, they were not yet seeing the sales. Now they are.
As one of my European gold refiner friends says: “It is very strange, because usually, when the price of gold is this high, we see a decline in retail demand for gold.
“China and India are waiting for a price correction before they buy, but not Europe. We have had orders for exceptionally large volumes of small gold bars, such as in the 50 gramme or 100 gramme size, which in turn they would be selling to European retail. Europe is still a net seller of gold, but that is because of jewellery scrap and ugly old used jewellery.
“For the future, the trend is very much in the direction of Europe becoming an importer of gold.”
Given how heavy even small gold bars are, why would that be? A wad of €500 notes is far easier to carry than the equivalent value in gold.
Well, it has become much, much more difficult to turn cash into bank deposits in the euro area. It is even becoming more difficult to move bank deposits from one eurozone country to another; there has been a significant increase in the amount and intrusiveness of documentation.
Soon, there might not be a discount for paying in ready cash, but a premium.
In effect, the required mechanisms for capital controls are already being put in place. Capital flight will have its wings clipped.
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