Precious metal prices have been caught in the “risk-off” selling engendered by the announcement last night from Standard & Poor’s that they were putting 15 eurozone countries – including France and Germany – on negative watch for possible credit downgrades. This usually means a 50% chance of a downgrade within 90 days, but S&P has upped the stakes by stating that it will announce any rating changes “as soon as possible” following this Friday’s European Council meeting of the 27 EU heads of government.
This could be construed as convenient timing for such a warning, although the given the escalation in the debt crisis over the last few months, such downgrades would hardly be surprising. Uncertainty is still the dominant emotion among traders with regards the European situation. If Friday’s meeting turns out to be fruitless, then we could see a truly ugly stock market and commodities rout on Monday.
The US dollar and US Treasuries would once again be the big beneficiaries of any such risk-off move by market participants. Precious metal prices would face serious resistance in the face of a strengthening dollar – the gold price in all likelihood would fall well below $1,700 per ounce and could once again be testing support at $1,600. In this sort of liquidity panic, the silver price would of course fair even worse than gold on a percentage basis, owing to the greater industrial component in silver demand vis-à-vis gold.
German chancellor Angela Merkel and French president Nicolas Sarkozy have reaffirmed their commitment for reform of the eurozone, though as Mary Ellen Synon points out at MailOnline, these reforms will have to subvert the normal process of amending and expanding EU treaty law if they’re to have any chance of coming into effect quickly. There simply isn’t enough time to go through formal EU channels if the bond market is to be appeased.
For great “big picture” analysis of what all this means for the eurozone and the wider world, readers could do a lot worse than watching Hayman Capital’s Kyle Bass’s recent talk at the AmeriCatalyst 2011 conference in Texas. Kyle notes that since 2007, the debt crisis has gradually been working its way up the food chain: from banks to small countries such as Greece, and now major European economies like Italy. He expects Japan – the country with the highest government debt-to-GDP ratio in the world – to face a serious crisis soon.
Ultimately, he warns that unless the US government adopts radical fiscal changes soon, it may be facing the mother of all financial crises in 3-5 years.