Real Interest Rates Negative (Base ECB 1.0%, BOE 0.5%) - Central Banks Prepare For Life After Euro

Published in Market Updates  Precious Metals Update  on 8 December 2011

By Mark O’Byrne


Gold is trading at USD 1,719.40, EUR 1,302.70, GBP 1,109.30, CHF 1,608.40, JPY 135,050 and AUD 1,689.4 per ounce.

Gold’s London AM fix this morning was USD 1,739.00, GBP 1,105.81, and EUR 1,297.28 per ounce.

Yesterday's AM fix was USD 1,731.00, GBP 1,108.20, and EUR 1,289.96 per ounce.

Gold edged higher in euros, pounds, dollars and most currencies today after the ECB cut its main interest rate from 1.25% to 1% and the Bank of England kept interest rates at 0.5%. Sharp selling came into the market after the ECB's Draghi commented that the economic outlook was bad. It is another strange and counter intuitive market reaction as a bad economic outlook is of course bullish for gold.

Gold appears to be consolidating between $1,667/oz and $1,803/oz and looks well supported at these levels due to concerns about whether EU policy makers can resolve the 2 year long eurozone debt crisis and protect the euro from a possible break up.

Gold in USD – 1 Day

UK  interest rates remain at their record low of 0.5% and QE continues in the UK with a further £275 billion being created to monetize debt and buy gilts. Eurozone interest rates are now back at record all-time lows.

The ECB, Bank of England, Federal Reserve and even the People’s Bank of China continue to pursue extremely loose monetary policies. Inflation is the official policy response in order to overcome this deflationary debt crisis.

Negative real interest rates, with inflation much higher than deposit rates, make gold an important diversification for investors and savers to hedge against currency debasement and monetary risk.

Central Banks Prepare For Life After Euro 
The Wall Street Journal reports today that central banks are preparing for life after the euro with countries studying printing national currencies in case the single monetary union collapses.

Given the real risk of a breakup of the currency as we know it today, that would seem like the logical and prudent thing to do. 

Major multinational corporations are planning for the possibility of this scenario and recently British Chancellor George Osborne said his government had contingency planning in place in the event of the break-up of the euro.

The Wall Street Journal reported that the Irish central bank is evaluating whether it needs to secure additional access to printing presses in case it has to print new bank notes to support a "reborn" currency.

The Journal quotes "people familiar with the matter" and says other central banks have started to weigh contingency plans to prepare for the possibility that countries leave the eurozone or the eurozone breaks up entirely.

The central banks said they would not comment and the Irish central bank called the article "speculation".

Currency devaluations are inevitable in the coming months and years.

Whether that be a sharp, fast devaluation of individual national currencies (lira, pesetas, escudos, punts) or that be a more gradual devaluation of a surviving single currency that is debased through massive and unprecedented debt monetisation.

While market and media attention is on the Eurozone and euro crisis the real risk of a systemic crisis remains. The risk of a ‘Lehman Brothers’ banking failure and consequent global financial contagion and failure of the banking system rises every day.

UBS Chief Economist Warns of Possibility of Euro Break Up and Importance of Precious Metals

The chief economist of UBS, Larry Hatheway, has warned that banks “should be asking themselves whether they would survive a collapse of the payments system, a run on deposits and widespread default on assets.”

And amid ensuing chaos, where should investors be allocating their assets? Precious metals feature highly on Hatheway's favourite asset allocation.

"I suppose there might be some assets worthy of consideration—precious metals, for example. But other metals would make wise investments, too. Among them tinned goods and small caliber weapons." 

"Break-up runs the risk of becoming one wretched scenario. Sadly, however, it can’t be ruled out, just as it would have been improper to rule out the horrors of the first half of the 20th century before they happened."

For breaking news and commentary on financial markets and gold, follow us on Twitter.

NEWS
(Reuters)
Gold consolidates as investors fret over Europe

(Wall Street Journal)
Banks Prep for Life After Euro

(Bloomberg)
Japanese Shoeshine Girls and Boys Sell Gold

(Financial Times)
Occupy sets its sights beyond Wall Street

(Financial Times)
Banks step up gold lending for dollars

COMMENTARY
(ZeroHedge)
Why UK Trail Of MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone And World

(KingWorldNews)
Hathaway: "Silver will hit new highs in a very short period of time.”

(Financial Armageddon)
More Trouble to Come

(Max Keiser)
House Prices Plunge in Chinese Ghost Town

(KingWorldNews)
Turk - The Banking System is on the Verge of Collapse

(FT)
The Terrible Consequences of a Eurozone Collapse


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