06 September 2012

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

Mario Draghi pledged the ECB to 'unlimited' purchases of short term sovereign debt for any Eurozone country that requested such help, any objection from Germany notwithstanding apparently. There will be a court ruling in Germany over such matters on 12 September.

They are expected to rule in favor of this action because the purchase of troubled sovereign bonds will be done in the secondary market, rather than directly. This also provides a nice opportunity for the banks to 'front-run' the ECB.

I am wondering what if any 'conditions' a country might be expected to meet should they ask Draghi and the ECB for 'help.' That may be an overlooked detail.

The ECB has pledged to 'sterilize' any such market actions so that they will not provoke inflation. The purchasing will be done on the short end of the curve, 3 years and in, and the actions may serve to drive more private buying at the longer ends in search of positive yields. In some sense Draghi is just catching up to Bernanke.

But at the end of the day, this is monetization of sovereign debt for the sake of propping up a zombie banking system and failed political union.

I should add here a parenthetical remark, that the same dynamics that caused the faux union in Europe to fail under the policy strains of a single currency would happen on a much larger scale should the world adopt a single currency regime or a harder peg to the dollar.

One cannot have a single currency and monetary policy without a fully integrated political union, or a set of artificial barriers and supports that emulate transfer payments. One size rarely fits all.

As the economic health of a country ebbs and flows, this should be reflected in the strength and weakness of their national currency in a 'freely traded' marketplace. The only way to counteract this is by trade barriers and subsidies, or outright transfer payments.

This is a lesson that must be learned, or rather re-learned again, by the world apparently.

The equity market took off like a scalded cat, but gold and silver are being firmly capped with relatively modest gains. What else might one expect on the day before a Non-Farm Payrolls report?

The equity rally *might* be overdone a bit at 1430 on the SP 500, but a cautious man would not care to stand in front of it, except perhaps to hedge bullion positions and other long positions.

Still, the reality of the economy has not changed one bit, just another opportunity for hot money to chase risk. So a man of a speculative mind might begin to nibble on the skeptical side.