London: Worried about the euro zone? Buy gold. Worried about the U.S. deficit? Buy gold. Fancy a quick speculative punt? Well, you can`t lose with gold… or silver, which has almost trebled in price in just over six months. But precious metals can`t be both safe havens and speculative plays. And with equity markets rightly signalling global recovery and higher interest rates, these speculative bubbles are set to be pricked before long.
The gold and silver bugs will say global sovereign risks justify their trade. Standard & Poor`s has put the United States on negative watch. Uncle Sam isn`t about to default, but it lacks a plan to put his finances straight. Gold bugs fear the U.S. Federal Reserve will buy more domestic debt, devaluing the dollar and precipitating inflation, making gold -- now at over $1,500 a troy ounce -- all the more precious.
A weak dollar ought to favour the euro. But that saddles investors with different sovereign risks. The euro zone won`t print its way out of trouble: Germans have seen a great inflation before and don`t fancy a repeat. The European Central Bank is raising rates and looks reluctant to extend emergency liquidity to troubled banks. But the euro zone periphery can`t pay its way, hence fears that Greece must undergo a debt restructuring that would be messy for its banks and risk contagion. Europe does not have a solution to the problem. What to do? Buy gold.
This logic would be compelling if the interest rate outlook was benign and gold didn`t already appear pumped up by speculative buying. The spectre of inflation means rates are already rising outside the United States. Global recovery is well underway. Intel , IBM (IBM.N) and Yahoo (YHOO.O) have reported good earnings. The latest ISM survey of U.S. manufacturing says the recent trend of "rapid growth" continued in March. Surveys confirm a German manufacturing boom. China`s first quarter GDP growth was 9.7 percent.
The reality is that the Fed won`t want to monetise the U.S. government`s debt. It will join the global trend of rising rates late this year or early next. The opportunity cost of holding precious metals will then rise. The end of free U.S. money threatens buoyant equity and commodity markets too -- but they are helped by the fact that the driver of the monetary tightening is growth. If speculative excesses are set to be curbed, nothing looks more vulnerable than the former safe havens of precious metals.
-- Spot gold hit a record high above $1,500 an ounce in Asian trading on April 20. Silver rose to a fresh 31-year high of $44.34 an ounce.
-- German manufacturing growth accelerated in April. A flash purchasing managers index, published by financial research firm Markit, rose to 61.7, the second highest level on record. A reading above 50 indicates expansion.
-- Greece sold more than 1.6 billion euros of three-month debt on April 19, with yields rising above 4 percent. The spread to German 10-year debt has risen to 1,140 basis points.
-- Juergen Stark, an executive board member at the European Central Bank and head of the bank`s economics division, said on April 19 that debt restructuring would be "extremely costly" for any countries that attempt it, and would imply a higher risk premium in the future. He also said it would have "an impact on the country`s banking sector, which holds a huge part of the government bonds."