Macro Guest Commentary: If Gold Is A Barbarous Relic, All Hail Barbarism!

From Brian Rogers of Fator Securities

Macro Commentary: If gold is a barbarous relic, all hail barbarism!

“Gold is money.  Everything else is credit.”  -J.P. Morgan, testifying to Congress in 1912.

Markets are reacting negatively today, to put it lightly, as the situation in Europe goes from bad to worse.  The Mer-Kozy meeting disappointed those clinging to the idea that Germany would agree to increase the size of the EFSF, which was never a very likely scenario, or the issuance of Euro bonds, which is a virtual impossibility.  Questions about a liquidity problem in got louder yesterday as a large European bank borrowed $500mm from the ECB’s 7-day liquidity program at a rate of 1.1%.  The Finnish Government is also making waves by actually having the temerity to make collateral demands on Greece for their outstanding loans.  Imagine that.  Meanwhile, hundreds of luxury automobiles were burned in Germany as a protest against the “fat cats”.  The net result of all this is a meltdown in stocks, a widening of spreads and the knee-jerk flight-to-quality reaction in to Treasuries (10yr trading at 2.035) and gold which set a new nominal high today of 1821.

Speaking of gold, have a quick read of the article about Hugo Chavez nationalizing Venezuela’s gold industry and more importantly, repatriating his physical gold from storage sites abroad back to Caracas.  The worry here is two-fold:  1) that his demands for physical delivery could stress the market given the estimates of somewhere between 30 and 45 paper ounces of gold issued for every 1 ounce of physical.  2) that this action starts a trend amongst countries that aren’t particularly US-friendly to repatriate and even potentially price sensitive commodities in gold.  How much longer will Chavez continue to sell his extremely useful, much needed petroleum products and in exchange accept increasingly worthless pieces of paper, ie USD?  Some might respond that if he did that, the US would instantly label him a terrorist and take him out.  Perhaps.  But what if Russia did it?  What if Iran did it?  If the commodity rich enemies of the US want to cause problems in this country they don’t need to fire a single shot, all they have to do is start selling their products priced in gold.  The end of the reign of the USD as reserve currency will follow quickly.

Adding injury to injury was the economic data today that stunk up the place.  If you happen to be sitting at a Bloomberg terminal, pull up the ECO screen and try not to panic.  The data was almost a complete disappointment from top to bottom.  CPI came in 30bps higher than expected, Jobless claims were higher and last months’ data was revised higher (per usual).  Leading Indicators came in higher at 0.5% vs 0.2% expected and 0.3% last month, but the housing date was terrible and the Philly Fed number at -30.7 which takes us back to territory not seen since March 2009.  Lovely.  Which brings us to the word of the day: STAGFLATION.  Got gold?  -Brian

* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

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