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ECB to QE or not QE that is the question for gold and silver prices

January 11, 2015 - 12:26pm

Gold and silver prices are hovering on the brink of a breakout this weekend as financial markets contemplate the time bomb that is now ticking with the European Central Bank finally on the spot over quantitative easing after a slide into deflation last week. January 22nd is the next ECB meeting. So will it be QE or not QE?

Precious metal prices are rising in anticipation of money printing in Europe. Eurozone stock and bond markets have been pricing it in too. But there is a problem. The Germans are the paymasters of Europe and loathe money printing because it destroyed their currency twice in the last century, and they can still put up quite a fight in the law courts.

No so simple

Then there is the problem that any bond buying program would have to include Greece which is insolvent and on the brink of leaving the euro again. As ever with the Byzantine politics of the European Union this is not a straightforward situation and a messy compromise is the most likely outcome.

Unfortunately global financial markets are expecting full blown QE from the ECB, partly as a logical response, partly out of self-interested greed. Reality is likely to be very disappointing. Equities will crash and bond markets spike. Gold and silver may still benefit as a safe haven trade though they would also benefit far more in the short term from the roll of the printing presses.

Three days after the ECB meeting there is an election in Greece that may bring the left-wing Syriza party to power whose mandate is to repudiate austerity even if it means leaving the euro. What will this mean for stability in global financial markets?

Lehman part 2?

The prospect of Greece leaving the euro and defaulting on its debts is ‘Lehman Brothers squared’ in the opinion of some economists. Ultimately that might well result in emergency money printing as it did in the US after the plug was pulled on Lehman. What else could the EU do? If you are drowning you don’t throw back a rope!

However, financial markets currently look ripe for a nasty disappointment. Bond yields are already so low in Europe you have to wonder what investors can possibly see in them. Gold and silver as monetary metals have considerable advantages in such awful conventional financial markets with no counterparty, i.e. default, risk and are structurally oversold.

Last year gold was the best performing currency after the US dollar. You have to wonder which will be No1 this year. Where will you be keeping your savings in this maelstrom?

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About Peter Cooper / Commentary Author

Peter Cooper is the editor and publisher of the ArabianMoney investment newsletter and the popular financial comment website www.arabianmoney.net.

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