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News that Spanish banks will need to raise another
€50 billion euros in order to deal with the
fallout from bad real estate loans has sent stock markets lower in trading
this morning. In addition, an auction of French government bonds this morning
saw the bid-to-cover ration reach its lowest level
since October 2010, while Italian bond yields are back above 7%. All of this
has sent the euro plummeting against the US dollar, with the EURUSD now below
1.284 – its lowest level since October 2010.
And as if the world didn’t have enough to
worry about, a Hungarian default is now looming large in traders’
minds. Such a default would be another serious blow to western European
banks, at a time when they can ill-afford more stresses and strains to their
balance sheets.
Though the precious metals and commodity complex
generally suffered last year on euro weakness/dollar strength (that infamous
“risk on”, “risk off” divergence), gold and silver
both put in solid performances in trading yesterday. The gold price reached a
high for this week at over $1,620 per troy ounce this morning, though has
fallen back towards $1,600 this morning on that same-old “flight to the
dollar” gut reaction that traders have whenever bad news from Europe
flashes up on the wires.
Commodities have fallen off a little after recording
strong gains on Tuesday, though oil prices remain resilient to selling
pressure. WTI crude is still above $102 a barrel, with Brent crude above
$113. Geopolitical tensions are undoubtedly a major factor in the strong bids
for crude, but as Robert Wenzel points out at his blog EconomicPolicyJournal,
Ben Bernanke has also printed an awful lot of money over the last few years.
Given oil’s pivotal role in modern economies, it’s hardly
surprising that some of these new dollars are spilling into the crude oil market.
Given crude’s importance, other commodities
will generally follow gains in oil prices, and vice-versa. This is also true
with regards silver, platinum and palladium – and to a lesser extent
with gold as well. As long as the mainstream press and hedge funds continue
to classify gold and silver as “commodities”, then for better or
worse, their fortunes will generally rise and fall with the broader commodity
markets. Gold does, however, tend to exhibit more independence from the
broader commodity markets than other metals – on account of its
monetary history and reputation as a safe haven.
Certainly as
far as silver investors are concerned (who have taken their fair share of
knocks of late) strength in crude oil is a bullish indicator. Silver will
likely start outperforming gold to the upside, should crude oil continue
moving higher.
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