The precious metal gold has long been seen as a traditional safe-haven asset in turbulent times. The value of gold has hit a six-month high of $1698 per ounce. The rally in its price has been spurred by a number of factors including the likelihood that the US Federal Reserve will embark upon a third round of quantitative easing (which could send the Dollar lower) – gold is Dollar denominated and would act as a hedge against a US currency downside as some investors leave the currency for the metal pushing up demand and price. Another factor is uncertainty over what the European Central Bank (ECB) will do to alleviate the on-going European Sovereign Debt crisis.
As investor jitters over Spain’s and Italy’s ability to service their debts persist, the yield on their sovereign bonds has edged up towards unsustainable levels. Both governments are at pains to stress that they have put reforms in place which are aimed at reducing deficits and restoring the countries to economic growth and placing them on a secure fiscal footing. The ECB President, Mario Darghi, has gone on record to state that he will do all that is necessary to save the Euro.
Today marks the first meeting of the ECB since the summer holidays. Markets are keen to see exactly what steps will be proposed to shore-up the Euro. It is widely expected that the ECB will embark on a further round of buying up sovereign bonds. The idea of this is that when bonds are in demand, the yield on them falls and therefore, the costs to the issuing nations for borrowing will diminish. Another stratagem that may be employed would be to reduce the interest that ECB pays for funds on deposit with it (possibly even to a negative value). The idea behind this concept is that it could spur banks to put money into the markets, thereby stimulating the European economy by aiding the money supply. Pessimists believe that some financial institutions would rather pay what amounts to a holding fee to the ECB than risk money in the markets in turbulent times. Time will tell.