Gold prices drop amid Greece austerity talks

In the Lead: “On Borrowed Time and Money”

The agreement on further austerity measures that was reached by Greece’s political leaders not only failed to ignite the orbital launch of many a risk asset, but it also actually resulted in what one might call a “launchpad failure.” While it could be argued that speculators had bought the ‘rumor’ of the agreement and then sold the ‘news’ that it has been arrived at, the deeper layers of the market story are certainly also worth considering. Because, in effect, Greece is now headed for a de facto referendum on whether or not its citizens might wish to remain an integral part of the European Union. In the interim, it is borrowing more time while restless demonstrators continue to circle government buildings.

No sooner had Athens signaled that further belt-tightening had been finally agreed upon that new demands for “show us the goods” were intimated by Europe’s finance ministers, and they have now pushed the prospect of Greece finally getting the money it so badly needs in order to avert a messy default into next week, at best. Standard Bank (SA) analysts listed the EU finance ministers’ “to-do” list as follows in this morning’s market report:

“Three conditions remain before approval will be considered—a further €325m in cuts, Greek parliamentary approval (should be this Sunday) and a pledge from Greek political leaders that they will maintain the reforms after the country’s general elections (this April). While indications are that the Greek parliament will approve these measures, there is enough uncertainty to keep markets on edge as we enter the weekend.” As a result, Friday is shaping up as a decidedly ‘risk-off’ day, and the aforementioned launch into orbit of assets other than the dollar was “rescheduled” for a later date. Houston, we have a problem, and it’s (still) called Greece.

Spot precious metals dealings opened on the weak side with all four principal metals that we track losing more than 1.2 and up to 2.1% this morning. Spot gold was down by nearly $25 at $1,704 per ounce, while silver was bid at near $33.25 with a loss of more than 60 cents. A first-in-two-years decline in Chinese exports and imports also added to the selling pressure in precious and base metals this morning. Standard Bank analysts opine that, should gold slip further, then the $1,700-$1,720 zone could be a good one within which to establish fresh short positions. While folks in India may or may not be buying or shorting gold at the moment, they sure are borrowing heavily against it.

So heavily, in fact, that the Reserve Bank of India is considering much more stringent regulations as regards to loan-to-value ratios being offered by gold-based lending firms. Borrowers pledging gold as collateral are frequently paying as much as 18-25% in interest to do so. The phenomenon brings to mind the word “margin call” in the event of a serious price slide in the yellow metal – many such extensions of credit are being made at rates of 75% loan-to-value and perhaps higher, prompting observers to believe that people who have pledged their bullion might be living on (literally) borrowed time. Gold is the one thing one ought not buy with borrowed money or hypothecate for the borrowing of (paper) money.

Speaking of positions, value and such, small retail investors who are still trying to figure out “why gold?” and “how much gold?” were faced with a string of news and statements of the head-scratching variety this week and are probably more confused than they have been in a while. To wit: economist Dennis Gartman said he is “wild-eyed bullish” on stocks and that he is now returning to gold as well (which he sees higher in euro and yen terms). Stop us if you’ve heard this one before, but, given long-term market history, equities and gold are supposed to be doing anything but moving in the same direction, at the same time. In fact, gold is normally added to a portfolio in order to mitigate against potential declines in stocks.

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