Elite World News

Il mese di marzo ha avuto due facce. Fino a venerdì 14 – il giorno in cui Wall Street ha salvato la Bear Stearns – il mercato dell’oro ha seguito il suo trend ascendente.

March was a two-sided month. Until Friday 14 — the day Wall Street rescued Bear Stearns — the gold market was steady on its trend.

On Monday 17 the metal peaked at US$ 1023.50 in London a.m. (the p.m. fixing was US$ 1011.25), but the next day the metal plunged and landed at US$ 913.5 on Thursday 20 (Figure 1). Since then the price has hovered below the US$ 950 line. In euros, the metal hit its record quotation on March 3 (€ 650.2 per ounce, i.e. € 20,904 per kilo) as the plunging dollar helped to stabilize gold quotations.
Markets, however, were in a real turmoil in those days. After having prompted the rescue of Bear Stearns, the Fed cut rates to 2.25%, i.e. below the current inflation rate. The sixth reduction from the start of the crisis in July sent the dollar to the dumps. Clearly, the Fed’s option is not only to ban or moderate the recession, but to ward off the fall in liquidity and solvability in the financial system. In doing this, however, it underscores inflation risks. Indeed, the surge in commodity prices, and the fall in the dollar are fuelling inflation expectations and by lowering the short-term real interest rate too much, the Fed is raising long term real interest rates. Because of the credit crunch, banks are neither eager nor always able to give credit and if they do, they ask higher real interest rates just because they foresee inflation.

It is difficult to withstand the temptation to worry about such developments, but the surge in gold is pointing to a grim scenario made up of lack of confidence and rising inflation. When prices rise too much, liquidity in the form of paper money implies a loss while in the form of gold holdings it does not. The current situation is then favourable to gold producers as anxiety, inflation and the rush to safety is attracting fresh capital from distressed assets to gold investment. Obviously, the same situation is highly unfavourable to the jewellery industry. Indeed, the near recession in the US and the deceleration in Europe offer little comfort to the jewellery industry, but it is the ballooning in the price of fine gold that is tarnishing jewellery demand everywhere.
Why then the fall in the price of gold from March 18 to March 20? Nothing really happened to the basically favourable scenario for gold, but the possibility that the financial turmoil could turn into a global recession could imply a fall in the demand for commodities. Perhaps it was also something more than a technical selling episode, i.e. a short fall in a general ascending trend due to mere bargain-hunting. The fall has been ascribed to across-the-board de-leveraging i.e. the exit from the market for many assets and commodities (gold included) of investors anxious about their exposure. Customers have been asked to deposit additional margins, and those without adequate cash reserves were forced to liquidate positions, thus prompting a sharp fall in commodity futures markets. The fall in the spot market, indeed, mirrored the one observed in the Comex gold June-2008 future market. In conclusion, it can be said that both the ascending trend and the sharp fall of March in the gold market were ripples coming from the general financial turmoil.

Also the euro area’s economy is two-sided. As a whole, the euro area is predicted to grow less than 1.8% in 2008 (2,4 % in 2007), but with large differences across countries. For instance, business sentiment is reported to be good in France and Germany, but it has fallen in Spain and Italy. As France and Germany are net exporters while Spain and Italy are net importers, the euro zone is lacking a real engine because the larger economies are unable to pull the rest. The drive to real demand cannot come from elsewhere because the American economy is almost in recession and the euro is too strong.

The European economy, however, is already perceiving the inflationary effects coming from the commodity side. It is also facing the risk that its gas imports from Russia will become much dearer. The ECB put the official rate on hold, but the effects of the tightening concluded in mid-2007 have not yet completely passed to the real economy. What is being currently perceived is the effect of the increase of the EURIBOR (the rate at which banks exchange liquidity). This is a problem, as the cost of bank credit is pegged to that rate and in the euro area firms are very dependent on bank credit.

The tightening of credit is then key for European producers. The illiquidity that the ECB tried to solve with the recent injections is already creating difficulties not only to banks and their customers but also to governments of the more indebted countries as servicing the debt is now becoming dearer. VIMET S.p.A.