Tuesday, August 23, 2011
The euro area may need to shrink to survive.
As its sovereign-debt crisis nears a third year and rescue efforts fail to stop the rot in financial markets, economists from Pacific Investment Management Co.’s Mohamed El-Erian to Harvard’s Martin Feldstein say ensuring the euro’s existence may require members to leave the 17-nation currency region.
The result would be what El-Erian, Pimco’s Newport Beach, California-based chief executive officer, calls a “smaller, much better integrated, fiscally strong euro zone.” While leaders such as German Chancellor Angela Merkel consistently rule out that option, El-Erian told “Bloomberg Surveillance” with Tom Keene on Aug. 17 that they eventually may embrace it over the fiscal union required to maintain the status quo.
“We’ve been warned by European policy makers never to underestimate their commitment to economic and monetary union, but that can also be interpreted as perhaps them, in the end, choosing quality over quantity,” said Stephen Jen, managing partner at SLJ Macro Partners LLP, an investment and advisory firm in London. “Political commitments to resolving the crisis cannot be infinite. We can’t have all the chips on the table.”
That the euro’s membership is even in debate is testament to the failure of its leaders to snuff out a debt turmoil that began in Greece in late 2009 before spreading to Portugal and Ireland. It now threatens Italy and Spain and this month has jolted France....read on
For firearms buffs I thought it only fitting to put up a Gold "1911" pic to celebrate this price moment.
A few days ago we penned "As Chavez Pulls Venezuela's Gold From JP Morgan, Is The Great Scramble For Physical Starting?" in which, logically, we wondered if the unwind of the great gold cartel, whose purported price manipulation has always resided in the domain of paper, or confidence-based, precious metals, may have started from the most unexpected source: Venezuelan dictator Hugo Chavez who just announced that he will not only nationalize the country's gold industry but reclaim his physical gold (however much of it may exist) from custodians such as JP Morgan and Bank of Nova Scotia.
The practical implications of this move are substantial- since then gold has seen record high after record high. Whether one attributes these moves to Chavez, or to yet another global "risk-flaring" episode is unclear. Luckily, Grant Williams, author of the always entertaining "Things That Make you Go Hmmmm", provides some very fascinating observations on this very interesting topic...
From the full note (presented below):
To sum up:
- It is common practice for most Central Banks to hold part of their gold reserves overseas in ‘gold trading centres’ (read London and New York)
- One of those Central Banks - that of Venezuela - wants its gold back
- That means that a group of banks (mainly in the UK and the USA) who are supposed to have that gold in their vaults need to GIVE it back...
- ...which in turn could potentially trigger a race to repatriate national gold holdings
- Neither Fort Knox nor the Federal Reserve (the world’s two biggest gold depositories) have been independently audited in recent times
- The status of the gold held in the Bundesbank (home to the world’s third-largest hoard) is somewhat unclear
- The practice of leasing gold by Central Banks has been going on so long that it even predates the time when Alan Greenspan advocated sound money
- The gold ‘physical market’ is approximately 100 times the size of the amount of actual underlying metal by which it is purportedly backed
- The top four bullion banks, or ‘commercials’ on the COMEX continue to run what we shall politely call ‘significant’ short positions (chart above)
In the three trading sessions since Chavez made his announcement on August 17th, gold has added almost $100, coming within a whisker of $1,900 before settling back at another record weekly close.
Market weakness? Maybe. Fear of further problems in Europe? Quite possibly. Continuing disgust with the world’s fiat currencies? Highly likely.
The beginning of a race amongst the world’s Central Banks to grab physical gold? Now THAT would be something to see...