In Europe, or anywhere for that matter, if you want to know what’s really going on you just have to listen out for the ‘official denial’.
On April 10, the Financial Times wrote:
‘Spanish ministers and European Union officials took turns on Tuesday to deny that the country needed an international bailout, in an effort to soothe the bond market.’
Translation: Spain needs a bailout.
The dysfunctional monetary union that is Europe is back in the spotlight. Spain’s economy is in recession. The government will not hit its budget deficit targets. The yield on 10-year Spanish government bonds breached 6 per cent for the first time since December.
And Italy is under pressure again too. 10-year government bond yields traded around 5.7 per cent recently and the Italian stock market plunged 5 per cent as a result.
The European Central Bank’s long-term refinancing operation (LTRO) managed to provide speculators with some confidence and play money for a few months. But it also created increased vulnerabilities in Spain and Italy’s banking systems.
It did this by encouraging the commercial banks to buy more government debt. The ECB gambled that by providing money at 1 per cent for three years, the banks could buy high-yielding government debt and make big returns. The strategy relied on the market suspending reality for three years.
Now, reality has come back to bite them. With government bond yields rising again, bank balance sheets are even weaker than they were at the end of 2011. Once again, the clowns running the financial system have just made things worse.
Whether this is the start of the big sell-off I’ve been predicting is impossible to tell at this stage. But it sure feels like it. Liquidity-fuelled rallies are temporary by nature. The biggest benefit they provide is confidence. And when confidence disappears, so do the gains.
Investors are not in panic mode just yet. Just as it takes some time for confidence to build after a prolonged period of weakness, it takes time for fear to set in.
We’re not at that point yet. After all, faith in the Fed remains high. More than likely ‘the market’ will now return to predicting/hoping for another round of money printing from the Fed. That should sort things out…It’s all so predictable.
What’s also predictable is the lame reasoning the media provides for explaining market moves.
Which is why you should never rely on day-to-day explanations for market fluctuations – especially when it comes to gold.
For example, the gold price jumped USD$78 per ounce (or 4.2%) in the first week of April. Apparently this had to do with hopes for QE3. But at the same time, the equity market sold off…even though we are usually told the equity market rallies on hopes of more money printing.
As I’ve written previously, gold and precious metals in general are highly manipulated markets. These are monetary and therefore political metals. The mainstream media has no idea about what’s going on in the background.
What’s important for you to focus on is the trend. The trend in precious metals cannot be manipulated. And longer term, the trend is bullish. The market is currently going through a long and painful ‘consolidation’ period. It’s gone on longer than I thought it would.
But that’s where patience comes into play. To ride the gold bull you must be patient and have conviction.
I’ll help with the conviction. The patience comes from you.
Editor, Sound Money. Sound Investments
From the Archives…
Small Caps – A Way to Bet on Developing Markets…Without Investing Overseas
2012-04-013 – Kris Sayce
All Transactions to be Conducted in the Presence of a Tax Collector
2012-04-12 – Simon Black
How You Can Use Government Intervention to Profit on the Stock Market
2012-04-11 – Kris Sayce
Australia – The Pacific Pawn in USA Versus China
2012-04-10 – Dr. Alex Cowie
If Ron Paul Were US President…
2012-04-09 – Mark Tier
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Written by Greg Canavan
Greg Canavan is a feature Editor at The Daily Reckoning Australia and is the foremost authority for retail investors on value investing in Australia.
He is also the author of Sound Money. Sound Investments (SMSI). An investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
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