The ECB provided 489B euros in three-year loans today, the most ever in a single operation, signaling that hundreds of banks foresee the need to hoard cash for a troubling 2012. The ECB said 523 banks asked for the 489B euros in funds, which will be lent at the average of its benchmark interest rate—currently 1%—over the 1,134-day loan period. The ECB move adds another fundamental reason to hold gold, as it injects more money into the markets, but does not solve the remaining solvency crisis.
Investor Insights: Are Investors Taking Advantage of Lower Gold Prices?
Barclays estimates that today's operation will inject 193B euros of new money into the system, with 296B euros accounted for by maturing loans. The loans amount to quantitative easing "through the backdoor," said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. "What the ECB is doing is providing ultracheap money to banks, which in turn are going to be in there buying the sovereign debt up," Derrick told Bloomberg Television’s First Look earlier today.
Although gold dipped to nearly $1,560/oz last week, many investors viewed the decline as another buying opportunity, because nothing in the financial landscape has changed. There are actually more uncertainties than ever before. The MF Global fiasco has reminded investors that financial markets are still extremely fragile. In addition to the $1.2B that has mysteriously vanished into thin air, customers are feeling even more pain from America’s eight largest bankruptcy in history. Barron’s reported earlier this week, "The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold 'warehouse receipts'to prove it—they’ll have to forfeit 28% of the value.", To add insult to injury, traders are still being charged storage fees for commodities.
Despite the Dow Jones Industrial Average hitting 12,000 again, investors may not be as bullish as the index shows. On Tuesday, several utility companies such as Xcel Energy and Duke Energy, hit fresh 52-week highs, while Southern Company and Consolidated Edison reached new all-time highs. Utility stocks are generally classified as defensive investments that cushion against volatility and downturns in the economy. Even in dismal economic times, people need to heat and light their households. On the other side of the spectrum, financial giant Bank of America recently traded below $5 per share, its lowest since March 2009. As the financial markets around the globe continue to deteriorate and send investors running towards defensive stocks, central banks around the world will face increasing pressure to offer even more quantitative easing. Such a move will add more fuel to gold’s 11-year bull market.
Eric McWhinnie, Wall St. Cheat Sheet