The Daily Market Report

Gold Surges on European Measures Similar to TARP and QE

29-Jun (USAGOLD) — Gold rebounded smartly on Friday, retracing all of the losses from earlier in the week and then some. In early New York trading the yellow metal was threatening to push back above $1600, bolstered by an EU summit inspired rebound in the euro and general risk appetite, and a corresponding retreat in the dollar.

There was a late-night breakthrough at the EU Summit that caught many by surprise, because German Chancellor Angela Merkel had claimed to be steadfastly opposed to much of what was agreed to. So, public bailout funds will be pumped directly into the Spanish banking system and the senior status of any such loans from the EFSF/ESM has been eschewed. Ireland is likely to get a banking system bailout as well. Additionally, the bailout facility will be able to directly buy sovereign debt, so it is widely believed that Italy will be the next EU member to request a bailout to drive down its borrowing costs. It’s sort of TARP and QE combined…

In exchange for all that largess, there will be a single banking regulator appointed for the eurozone, a step toward a banking union, and countries accessing these facilities will be expected to honor their debt and deficit commitments. While EU officials may also be able to demand “tighter deadlines and timetables” according to an FT article, there will not be any “Greek-style monitoring programmes.”

Maybe the periphery countries have learned their lessons; that missing targets — or worse yet, reporting false data — results in nothing but trouble. But more likely, it may be an acknowledgement on the part of the EU that the these countries aren’t going to make their numbers, so let’s not monitor them because ultimately it will be easier for them to ask forgiveness than permission. I recall the old Reagan adage ‘trust, but verify’: apparently that’s no longer necessary, the periphery can apparently now simply be trusted to honor their commitments in exchange for bailouts.

Nonetheless, this is exactly the kind of thing that markets love: Pumping public money into private institutions, while simultaneously suppressing interest rates with artificial demand so they no longer accurately reflect risk. You may recall that the combination of TARP (Sep-2008) and QE1 (Nov-2008) ended the financial crisis inspired deleveraging correction in gold and launched the yellow metal from 681.65 to 1920.50. Might Europe’s TARP/QE combo package have a similar result? Only time will tell, but the initial reaction sure looks favorable.

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