“Quiet Session” Sees Gold and Silver Flat, ECB Could Create “Dangerous” Two Tier Debt Market

Friday 17 February 2012, 09:00 EST

“Quiet Session” Sees Gold and Silver Flat, ECB Could Create “Dangerous” Two Tier Debt Market

SPOT MARKET prices for buying gold held just above $1730 an ounce during flat trading this morning in London, as speculation continued over whether a Greek bailout will be agreed next week.

Prices for buying silver were also very flat – hovering above $33.50 an ounce – as were those for commodities and stocks ahead of President’s Day in the US on Monday.

“A quiet session,” said one Hong Kong gold dealer this morning.

Heading into the weekend, the price of buying gold was up less than half of one percent on the week by Friday lunchtime, with silver also showing very little movement from last Friday’s close.

German finance minister Wolfgang Schaeuble has reportedly called for Greece to be allowed to default. Chancellor Angela Merkel is firmly against such a development, according to press reports.

“Schaeuble doesn’t think the Greeks can deliver any more [austerity measures],” an official from Merkel’s CDU party tells the Financial Times. Schaeuble has also this week suggested Greece should postpone general elections scheduled for April and install a technocrat government.

Eurozone finance ministers are due to meet Monday to discuss Greece’s second bailout, with Germany, the Netherlands, Luxembourg and Finland – all rated AAA by ratings agencies – calling for increased permanent supervision of Greece’s fiscal affairs.

“The one thing we should take away from Lehman Brothers,” former US Treasury secretary Henry Paulson said this week, “is you don’t want a big systemic institution to fail in a messy way, and you clearly don’t want that to happen with a [Euro] member state.”

“We expect [gold's sideways] trend to continue into the weekend, as participants remain wary of taking on new positions ahead of Monday’s Eurozone meeting,” says today’s note from Standard Bank commodities strategist Marc Ground.

The German parliament is expected to vote on any bailout deal on February 27. If enough members of Merkel’s coalition government oppose the measure, she may need to rely on opposition Social Democrat and Green votes.

Elsewhere in Germany, Merkel’s personal choice for the ceremonial role of German president resigned today amid allegations he misled parliament over a €500,000 loan to buy a house.

The European Central Bank meantime is expected to swap its existing Greek bonds for new ones that would not tie it to any collective action clauses to which private investors would be subject.

This means the ECB would be protected from taking losses on its holdings – an event that ECB
president Mario Draghi has said would amount to monetization of government debt.

“In Europe, all bond holders are equal, but the ECB is more equal than others, apparently,” says Thomas Costerg, London-based economist at Standard Chartered bank.

“This could set a dangerous precedent, and, by creating a de-facto two-tier market, this could discourage investment in other peripheral debt markets.”

If private sector Greek bond losses are deemed to be involuntary, this could also trigger payments on credit default swaps, which act as a form of debt insurance.

“The probability of triggering CDS has increased because the ECB has protected itself,” says Padhraic Garvey, head of developed-market debt at Amsterdam-based ING Groep.

The United States meantime has no plans to give additional money to the International Monetary Fund, US Treasury undersecretary for international affairs Lael Brainard told the Senate banking Committee Thursday.

US consumer price inflation dropped to an annual rate of 2.9% last month, according to figures published Friday – down from 3.0% in December.

China’s central bank may have been buying gold in the fourth quarter of last year, according to a report in Friday’s FT.

Elsewhere in China, a huge stockpile of silver bullion has built up in the country, according to investment bank analysis this week.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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