The price of gold hit an all-time high of €1,381 as Spain lays the groundwork for European Central Bank bond buying. Last week the Spanish finance minister outlined an austerity budget that would slash spending by 8.9% and introduce a
number of structural reforms that are in line with potential bailout terms outlined by the EU.
The market has seen this move as a clear indication that Spain is preparing the ground for a formal request for a bailout, paving the way for the ECB to begin buying its sovereign bonds. In fact the Spanish Prime Minister, Mariano
Rajoy said earlier last week that he will ask for a bailout if interest rates remain too high for too long (although he cautioned the conditions for the bailout need to be reasonable).
Investors believe the ECB is closer to buying Spanish sovereign bonds and hence paving the way for further medium-to-long-term debasement of the euro. Although Spain has not formally asked for a bailout from the EU or for the ECB to begin buying its sovereign bonds in the secondary market, the Spanish finance minister was at pains to emphasize that its economic reforms were in line with EU recommendations. A bottom-up study by Oliver Wyman showed that the
Spanish banking sector needs €59.3bn of new capital.
Investors remain nervous about how the banking sector will meet this shortfall, keeping the Euro under near-term pressure. Tactically, a bailout request would likely improve Euro investor sentiment, pushing up the Euro versus the dollar, benefitting gold and other precious metals.
South Africa mine strikes continue to spread, affecting precious metals supply outlook
AngloGold Ashanti, the world’s third largest gold miner, halted operations last week after most if its 35,000 workers in South Africa went on strike.
Lonmin, the platinum miner had just got its employees working again after agreeing to wage increases of up to 22% in the previous week. Anglo American Platinum began disciplinary action against striking employees after the attendance
rate of employees at its Rustenburg mines fell below 20%.
The spread of strike action to gold miners from platinum and palladium miners has stoked gold supply concerns. Some investors appear to have been hedging their mining company equity exposures by increasing their direct holding of metals. Holdings of gold and platinum ETPs have risen to an all-time high.
Key events to watch this week: Focus on the central banks
The minutes from the meeting in which FOMC members decided to embark on QE3 will be released this week.
The minutes will give a view of the thought process behind the decision to move ahead with another round of quantitative and other easing policies.
The BoE and ECB will have policy meetings this week. While changes in policy rates are not expected, the ECB’s press conference may give further details about its policy of potential “unlimited” purchases of European sovereign bonds.
ETFS Physical Swiss Gold Shares (SGOL)