Author : John E. Charalambakis
Date : May 21, 2013
Late last year I wrote that we anticipate precious metals to suffer losses in 2013. We would not be surprised if this lasts more than a year. In one of the commentaries late last year, I was also wondering if this year would be crowned as a year of vindication for central bankers. The arc-enemies of the latter are inflation (and whatever threatens price stability) and gold (since the latter defies fiat money and exemplifies fears of financial instability). In this week’s commentary, I would like to outline some of the reasons why I believe that in the foreseeable future precious metals will follow a downward trajectory, and relate that to the proclaimed “recovery” in Euroland.
Let’s start with precious metals. Here are some facts:
What then should we say about the proclaimed “success stories” from Spain, to Greece, and Portugal, and the revived confidence in the Euroland? The graphs below show the declining yields of Spanish and Greek bonds. This is indicative we are told of the “success turnaround story”, and if that is even perceived as true, we should not be surprised to see precious metals to experience lower prices.
There are reported stories of funds that desire to invest in peripheral and Southern Europe, and expectations are being elevated that now that “Grexit” is history, Greece will be welcomed back in the markets within a year with a ten-year note whose yield will be than 6%.
Very briefly we could say the following: If the hope is about more debt issuance and other paper assets, those countries did not learn the lesson of putting their houses in order. They did not learn that success is not the ability to issue debt but rather the ability to produce real things, to innovate, to create capital and wealth, to wake up dormant assets, to cut waste, to advance hard asset holdings and to enhance competitive advantages. That fascination with debt issuance is lethal. In an environment of financial instability, a bond in the balance sheet is a third party liability and that’s how it should be treated and will be treated when the music stops again.
Ratings upgrades are good. Bond rallies are nice. Rumors about hedge funds investing in local businesses are wonderful. My question is: Where is the substance? Did GDP go up? Did unemployment go down? Was a factory built? Is liquidity increasing? Is poverty and misery down? Are we serious when celebrating banks’ recapitalization when 90% of the capitalization needs is provided by government borrowing? Is the Greek Euro the same as the German Euro? (i.e. could Greek companies borrow at about the same rate as the German ones?) Are incomes higher? Are we celebrating too soon for things that do not touch the shrinking middle class? Is there any concern that we may be able to stop the hemorrhage but unable to recover the patient?
The truth of the matter is that the divergence between assets and the real economy is growing (as shown below) and as the gap increases the possibility of collapse rises too.
Why am I questioning the “progress” made? In a world that has lost its direction, its priorities, its anchors, and its heroes and which is accustomed to be amused to death via infliction of placebo pleasure treatments, I thought that it may be better instead of providing answers to question the answers provided.