Gold,
silver, stocks and commodities bounced on Friday, with talk in America
of further mortgage-back securities (MBS) purchases by the US Federal Reserve
igniting hopes among traders of more easy money. In addition, hopes are
growing that European politicians are at last arriving at some sort of
plan to address the continent’s sovereign debt problems. This is
encouraging equity and commodity buying, and has led to US dollar
selling – as traders leave this so-called “safe haven”. The Dollar Index
(USDX) settled right on its 50-day moving average on Friday, around
76.3. Further dollar selling would once again tip the greenback into a
bearish trend that should be bullish for gold and silver.
At the European Council meeting in Brussels, European leaders are
trying to reach a compromise on the extent to which banks should take a
“haircut” on their Greek loans. German chancellor Angela Merkel
continues to favour tougher love for the banks, while French president
Nicolas Sarkozy taking a more bank-friendly approach. (Not
coincidentally, French banks have the heaviest exposure to Greek debt of
any major euro economy). Write-downs on Greek debt in the range of
40-60% were under discussion, with France favouring 40% and Germany erring towards 60%.
Under new proposals, 90 significant lenders would be expected to
raise their capital ratios to 9%, with government help for those who
cannot raise the funds on the private market. Europe’s leaders are also
discussing plans to leverage the European Financial Stability Facility
in order to increase its lending capacity.
The US dollar dropped to a post-Second World War record low against
the Japanese yen on Friday, on suggestions from Fed officials that more
MBS purchases may be necessary in order to provide further “stimulus”
for the US economy. Dan Tarullo, a member of the Fed’s Board of
Governors, spoke out in favour of this measure last Thursday, while Fed
chairman Ben Bernanke also remarked the same day that the Fed may need to do more to aid recovery in the US housing market.
However, inflation statistics for the US are hotting up, with new
data showing that the Producer Price Index rose from 6.5% in August to
6.9% in September. In addition, the M2 measure of money supply continues
to surge. This suggests that contrary to the continual warnings about
“the risk of deflation” from the Washington economics establishment,
accelerating inflation could turn into a serious problem for the Fed.
Thus, given these growing inflationary pressures, it seems unlikely
that the Fed will pour more petrol on the fire and agree to further
money printing just yet – though this possibility cannot be entirely
ruled out: after all, in the UK inflation is running well-above the Bank of England’s
supposed “target” of 2%, yet the BoE has just agreed to more
quantitative easing. Jim Sinclair’s MineSet links to analysis from
Richard Belfanti, who thinks that weakness in the US banking sector
caused by the continuing over-valuation of banks’ assets will guarantee
continued quantitative easing/money printing from the Fed.
