Historic ECB Gamble, Looks Set To Print Euros And Debase Currency Versus Gold

GoldCore's picture

Gold was 0.2% higher for the week and silver was 1.17% higher. Gold has a marginal loss of just 0.02% yesterday. Silver slipped to as low as $18.90 before it also rallied back higher and ended unchanged on the day.

Futures trading volume remains lacklustre and was 42% below the average for the past 100 days yesterday, according to data compiled by Bloomberg. This week gold bullion’s 60 day historical volatility fell to the lowest since April 2013.

ECB, Frankfurt, Germany

The slightly better than expected jobs number, did not see gold come under pressure as was expected. Yesterday’s ECB decision is actually much more important to the long term outlook for gold.

The ECB made a historic decision and became the first major central bank to take the extraordinary step of charging interest on deposits. ECB President Mario Draghi cut the deposit rate to minus 0.1% and lowered the key interest rate to a record 0.15%. Draghi signalled that QE and debt monetisation is still on the table and may be seen in the coming months.

While the euro strengthened against the dollar by the end of trading, it fell against gold. This suggests the move may not have the desired effect of lowering the value of the euro. Market participants may realise that competitive currency devaluations are set to continue and no major nation is, at this time, willing to see its currency appreciate versus another major trading partner.

The ECB’s move should lead to the euro further weakening against gold and increase demand for gold in Europe as investors move to hedge their euro exposure. Hard pressed savers may also allocate some of their non yielding savings to gold.

Ultra loose monetary policies, negative interest rate policies (NIRP) and the possibility of the ECB printing euros to buy bonds will make the gold shorts nervous and should contribute to a pickup in demand for gold - especially in Europe.

European and bonds rose yesterday, buoyed by the ECB's promise of another tidal wave of money.

Benchmark 10 year yields on Italian, Spanish and Irish government bonds all plunged to their lowest ever in early trading on Friday, with the Irish yield almost 10 basis points below comparable U.S. borrowing costs.

The global bond bubble just got more bubbly … it is unlikely to end well.

Stock markets, following Wall Street's march to yet another record peak on Thursday, rose too, with high risk bank shares leading the way. The pan European index of Europe's leading 300 shares is on track for its eighth consecutive weekly gain as “irrational exuberance” continues in global markets.

Gold in Euros -2 Years - (Thomson Reuters)

Germany saw loud criticisms of the recent move, both from the political spectrum but also from the industry, finance, banking and pension sectors. German saver and pension groups expressed their fear, long echoed here,  that hitting banks’ profits would merely prompt them to cut their interest payments to ordinary savers.

Der Spiegel deemed it was the “end of capitalism”, while Die Welt described Mr Draghi as Europe’s Bismarck and as a near autocrat beyond control.

A senior member of German Chancellor Angela Merkel’s coalition joined banks, insurers and pension companies in denouncing the ECB’s historic gamble.

Critics of the ECB President Mario Draghi said he is debasing the currency and expropriating German savers. Ralph Brinkhaus, the finance spokesman in parliament for Merkel’s Christian Democrats, said in an e-mailed statement that “the ECB has to watch out that it doesn’t exceed the limits of its mandate,” according to Bloomberg.

Draghi’s decision, reopened a rift between Merkel and German economists and lawmakers who are concerned about currency devaluation and the risk of inflation.

The ECB’s decision will “go down in the history books as ineffective,” the Berlin-based VoeB state banks federation said. The historic low interest rate will undermine efforts of millions of Germans to save for retirement, said the GDV, which represents Allianz SE and Talanx AG.

“The bill is being footed by all of those who are investing money for the long term, the savers and holders of life insurances,” Sinn said.

‘Alternatively for Germany’, the growing anti-euro protest party that won 7% of the vote in European elections this month, renewed its call to dismantle the single currency.

Draghi “is exclusively concerned with holding the euro area together at any price” and his policy “amounts to expropriation” of savers, Joachim Starbatty, a University of Tuebingen economist, said in a statement from the party.

Starbatty was among plaintiffs who lost a bid in 2011 to get Germany’s constitutional court to stop German participation in the first bailout for Greece, the country that set off the euro’s debt crisis in 2009.


“And Germans have to pay the bill once again,” he said today.

GoldCore Conclusion
It is not just Germans that are paying the bill of the ECB’s policies. Mr Starbatty should go and meet hard pressed taxpayers in Ireland, Cyprus, Greece, Spain, Italy and Portugal. He should also go and meet hard working savers in all countries who are being penalised by the ECB’s ongoing financial repression.

Struggling taxpayers have been lumbered with the huge debts of reckless and insolvent banks.

The challenge across Europe is massive levels of debt across all stratas of society. This challenge of huge debt levels will not be addressed by reducing interest rates to zero or negative interest rates. The scale of the debts is too great for this.

The only long term sustainable solution is to have a comprehensive debt restructuring and debt forgiveness programme in the EU and indeed globally.

The key problem today is not the cost of money or borrowing, it is the scale of the debts. Printing euros to buy bonds will only compound the problem as more debt is piled upon existing debt. When interest rates eventually rise, which inevitably they will, the increased levels of debt and the impaired ECB balance sheet will see a problem of greater magnitude than the one seen in recent years.

A failure to address this and adopt a programme of debt restructuring and debt forgiveness will lead
to the failure of the monetary union. As periphery nations will be left with no choice but to revert to their national currencies in order to prevent economic dislocations and collapse.

Ultra loose monetary policies have not worked in the U.S. since 2008 or in Japan where interest rates have been below 2% for more than 13 years, since 2000.

Why on earth should this gamble work in the EU?

The Germans have long been vocal about the risks that this would not work and it would lead to currency debasement. However, the consensus view amongst many experts and much of the media has been to ignore the Germans as their historical experience makes them paranoid about inflation.

But, what if the economic consensus is wrong again? As it was prior to the financial crisis.

And what if the Germans are right? We have long said that we believe the Germans are right to look to their history and learn the lessons of the past.

Maybe the cosy consensus that the panacea to this crisis is more cheap money, competitive currency devaluations and currency debasement is wrong?

Gold in Euros - 5 Years - (Thomson Reuters)

As we said yesterday, cheap money, financial repression and currency debasement are classic recipes for short term financial and economic gains. Throughout history, they have been the easy options for emperors, kings, queens and governments. They are the easy option of central banks today.

However, throughout history currency printing and money debasement have never been a recipe for creating jobs and for long term sustainable economic growth and prosperity. Indeed, they inevitably lead to the general populace suffering the ravages of inflation.

The ramifications of today’s extreme ultra loose monetary policies, that are being seen internationally, are yet to be realised. Complacency abounds.

Will banks respond by beginning to charge savers an interest rate for their deposits? Savers, the backbone of the our capitalist system, are already suffering from negative real interest rates with bank deposits generally yielding less than government headline inflation in many countries.

Further financial repression, could be ‘the last straw which breaks the laden camel's back.’

Indeed, it could lead a minority of depositors to remove some their cash from already vulnerable  banks and deposit them in less risky banks internationally that offer a yield. It could also lead them to invest in safer assets that offer a yield such as AAA rated government and corporate bonds - thereby weakening an already fragile banking system.

Gold has always been criticised due to its lack of yield, unlike stocks, bonds and deposits. However, given the ECB’s historic decision yesterday and the continuation of ultra loose monetary policies, many investors and depositors will now rightly see non yielding gold as an increasingly attractive diversification.

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supermaxedout's picture

1) Draghi likes gold and wants to boost the price of gold because then the ECBs balance sheet would look much, much better. Draghi said on several occasions, that he did not think that it was a good idea when some central banks sold huge parts of their gold.

2) The ECB bench mark interest rate was prior to the last meeting already close to zero. Now its even a bit closer but that makes no difference at all. The move was only itzy bitzy tiny. So nothing changed.

3) What is of greater interest is Draghis plan to encourage the banks under ECB supervision to produce ABS consisting of auto loans, consumer loans, loans for SMEs and similar stuff.  This is going to bring the rates for these kind of loans down because the banks can offload the risk to the ECB which is willing to buy these ABS.  The only difference between the US made ABS and MBS and the now initiated Euroland version is, that the quality of the content of these loan packages is much, much better compared to the triple  AAA rated junk ABS/MBS priot to the Lehmann event. 

So the new ECB strategy has really the potential to boost the lending all over Euroland thus firing up the economy.

4) And as far as the Euro itself is concerned it is a fact that more than 30% of the reserves of PBOC are now denominated in Euros while the Dollar share is shrinking. This says much how the Chines do evalute the value of the Euro: See also this: http://www.volontegenerale.nl/artikelen/currency-swap-between-china-and-...

5) Till now the US has Euroland under control but the never ending hostile actions of the US and UK against the Euro can change this any day. The day Euroland turns away from the Dollar is the end of the US Dollar system. There is no doubt about it.



SeventhCereal's picture

There are no penalties for failure but plenty of chances for profit by siphoning money over to special interests and chum friends in the private sector.  There needs to be penalties for incompetence and failure.  Such as forfeiture of assets on a pro-rata basis or even jailtime.  You want to talk about derivatives are WMD's this is it, giving this ass clown a free call option to risk ruining economies of entire countries for personal benefit.

disabledvet's picture

The most important piece of real estate right now is not Crimea but Cyprus in my book.

falak pema's picture

destroying the future to preserve the dishonest oligarchical present. 

What else does a giant squid do?

Fíréan's picture

Draghi is a goldman sachs man, go figure( there's no "ex" with those people is there ?). Same bank which profited from assisting EU countries, specific Greece, to circumvent the rules for joining the common currency. Also  once an  executive director of the worlbank,  is draghi now operating with the interests  of european countries or at the behest of his former employers and associates ?

SAT 800's picture

The first time I heard of the "Euro"; I thought, that can't be right. It sounds like a bladder disease. "Doc, my euro is bothing me again"; well, we'll have to do some tests, maybe give you some anitbiotics?"  Who the fuck would name a currency the euro? THE FRENCH. That explains everything.

Volaille de Bresse's picture

THE FRENCH? No you're wrong bozo. It was probably the Germans or some gray Brussels bureaucrat...

AdvancingTime's picture

I have not written much about the Euro-zone as of late because nothing is really happening. The Euro-zone is engaged in a talkathon, with fear of an immediate collapse off the table the members of the Euro-zone much like their political counterparts in America just talk about solutions without any action.

For us in America news from across the pond dribbles out in small doses with almost daily media boost of promises that things are getting better. For more on all of "what is not happening" see the article below.


Xploregon's picture

Could someone out there in ZH land more worldly and economically wiser than me translate this from the article above as it might apply to the USA?;

“The bill is being footed by all of those who are investing money for the long term, the savers and holders of life insurances,” Sinn said."

If the US devalues and/or goes negative interest ala ECB, what do you think would happen to US owned and/or foreign owned (doing business in the US) life insurance companies and/or the effect on benificiaries of life insurance proceeds? Would life insurance companies fold? Would or could insurance proceeds evaporate? Should we cancel policies now and redirect premiums into safer vehicles? Would it be foolish to enter into a 10 to 20 year life insurance policy under the current economic/monitary conditions? Your thoughts?

SAT 800's picture

 A life insurance policy ? Big Silver Bars stored in a dusty basement in a quiet law abiding town in a very conservative country. otherwise; fergeddaboudit.

BeetleBailey's picture

Read somewhere where 71% of Germans want the Mark back....can't say as I blame them....

SAT 800's picture

71%, right that's every German who isn't drunk or smoking corn silk. Blame them? fuck no, you can't blame them.