Gold
reclaims its currency status as the global system unravels By Ambrose Evans-Pritchard
| Published: 5:43PM BST 20 Jun 2010
We
already know that the eurozone money markets seized up violently
in early May as incipient bank runs spread from Greece to
Portugal and Spain, threatening the first big sovereign default
of our era.
Jean-ClaudeTrichet, the president of the
European Central Bank (EC), talked days later of "the
most difficult situation since the Second World War, and
perhaps the First".
The ECB’s latest monthly bulletin
gives us some startling details. It reveals that the bank’s
"systemic risk indicator" surged suddenly to an
all-time high on May 7 as measured by EURIBOR derivatives
and stress in the EONIA swaps market, exceeding the strains
at the height of the Lehman Brothers crisis in September
2008. "The probability of a simultaneous default of
two or more euro-area large and complex banking groups rose
sharply," it said.
This is a unsettling admission. Which two
"large and complex banking groups" were on the
brink of collapse? We may find out in late July when the
stress test results are published, a move described by Deutsche
Bank chief Josef Ackermann as "very, very dangerous".
And are we any safer now that the EU has
failed to restore full confidence with its €750bn (£505bn)
"shock and awe" shield, that is to say after throwing
everything it can credibly muster under the political constraints
of monetary union? This is the deep angst that lies behind
last week's surge in gold to an all-time high of $1,258
an ounce.
The World Gold Council said on Friday that
the central banks of Russia, the Philippines, Kazakhstan
and Venezuela have been buying gold, and Saudi Arabia’s
monetary authority has "restated" its reserves
upwards from 143m to 323m tonnes. If there is any theme
to the bullion rush, it is fear that the global currency
system is unravelling. Or, put another way, gold itself
is reclaiming its historic role as the ultimate safe haven
and benchmark currency.
It is certainly not inflation as such that
is worrying big investors, though inflation may be the default
response before this is all over. Core CPI in the US has
fallen to the lowest level since the mid-1960s. Unlike the
blow-off gold spike of the Nixon-Carter era, this rally
has echoes of the 1930s. It is a harbinger of deflation
stress.
Capital Economics calculates that the M3
money supply in the US has been contracting over the past
three months at an annual rate of 7.6pc. The yield on two-year
Treasury notes is 0.71pc. This is an economy in the grip
of debt destruction.
Albert Edwards from Societe Generale says
the Atlantic region is one accident away from outright deflation
- that 9th Circle of Hell, "abandon all hope, ye who
enter" . Such an accident may be coming. The ECRI leading
indicator for the US economy has fallen at the most precipitous
rate for half a century, dropping to a 45-week low. The
latest reading is -5.70, the level it reached in late-2007
just as Wall Street began to roll over and then crash. Neither
the Fed nor the US Treasury were then aware that the US
economy was already in recession. The official growth models
were wildly wrong.
David Rosenberg from Gluskin Sheff said
analysts are once again "asleep at the wheel"
as the Baltic Dry Index measuring freight rate for bulk
goods breaks down after a classic triple top. The recovery
in US railroad car loadings appears to have stalled, with
volume still down 10.5pc from June 2008.
The National Association of Home Builders’
index of "future sales" fell in May to the lowest
since the depths of slump in early 2009. RealtyTrac said
home repossessions have reached a fresh record. A further
323,000 families were hit with foreclosure notices last
month. "We’re nowhere near out of the woods,"
said the firm.
It is an academic question whether the US
slips into a double-dip recession, or merely grinds along
for the next 12 months in a "growth slump". For
Europe, nothing short of a sustained global boom can lift
the eurozone out of the deflationary quicksand already swallowing
up the South.
Spain had to pay a near-record spread of
220 basis points over German Bunds last week to clear away
an auction of 10-year bonds, roughly what Greece was paying
in March. Leaked transcripts of a closed-door briefing to
the Cortes by a central bank official revealed that Spanish
companies have been shut out of the capital markets since
Easter. Given that the Spanish state, juntas, banks and
firms have together built up foreign debts of €1.5
trillion, or 147pc of GDP, and must roll over €600bn
of these debts this year, this is a crisis unlikely to cure
itself.
By their actions, investors show that they
do believe the EU can be relied upon to back its rescue
rhetoric with hard money, and for good reason. Germany’s
coalition risks breaking up at any moment, fatally damaged
by popular fury over the Greek bail-out. Far-Right populist
Geert Wilders is suddenly the second force in the Dutch
parliament. Flemish separatists have just won the Belgian
elections in Flanders. The likelihood that an ever-reduced
group of German-bloc creditors facing disorder and budget
cuts at home will keep footing the bill for an ever-widening
group of Latin-bloc debtors in distress is diminishing by
the day.
Fitch Ratings said it will take "hundreds
of billions" of bond purchases by the ECB to stop the
crisis escalating. Since Bundesbank chief Axel Weber has
already deemed the first tranche of purchases to be a "threat
to stability", it is a safe bet that Germany will fight
tooth and nail to prevent such a move to full-blown quantitative
easing. The blood-letting along the fault-line between Teutonic
and Latin Europe will go on, as the crisis festers.
Yet the markets are already moving on, in
any case. They doubt whether the EU’s strategy of
imposing of wage cuts on half of Europe without offsetting
monetary and exchange stimulus can work. Such a policy crushes
tax revenues and risks tipping states into a debt-deflation
spiral, as if everbody had forgotten the lesson of the 1930s.
Greece’s public debt will rise from
120pc to 150pc of GDP under the IMF-EU plan. There is a
futile cruelty to this. As Russia’s finance minister
Alexei Kudrin acknowledges, a Greek "mini-default"
has become inevitable.
EU president Herman Van Rompuy confessed
that EMU lured countries into a fatal trap. "It was
like some kind of sleeping pill, some kind of drug. We weren’t
aware of the underlying problems," he said.
What he has yet to admit is that the North-South
imbalances built up since the euro was launched - indeed,
because the euro was launched - cannot be corrected by further
loans from the North or by pushing the South in depression.
The political fuse will run out before this reactionary
and self-defeating policy is tested to destruction.