Speaking of the “illusion of understanding the world” of giving emphasis to “noises” especially on ticker tape activities, gold’s magnificent one day surge amidst collapsing stock markets have breathed life to the quack theory that gold stands as refuge to deflation in a world of paper money.
Stock markets collapsed alright, but Spanish and Italian sovereign bonds RALLIED.
The euro posted a huge .56% bounce on Friday too, which coincided with both the rally of Spanish-Italian bonds and gold.
The guys at Zero hedge offers this explanation[1]. (bold emphasis mine)
But Italian and Spanish bonds rallied. It seems EUR96 was the line in the sand that the ECB (or their proxy banks) decided was enough for Spanish 10Y bonds and that was where they were defended to (though we are suspicious why ECB would step in now after 4 months absence). There was eventually some notable divergence between underperforming Spain and outperforming Italy by the close (+40bps on the week vs +27bps). We suspect that much of the sovereign outperformance was a combination of Sovereign CDS-Bond basis traders (buying bonds and buying protection in Spain to lock in that wide spread) and a replay of the short financial credit, long domestic sovereign credit trade (as in banks will underperform the sovereign if things hit the fan/wall). That is the flow that was evident when looked at across markets.
My guess: the stealth contingent Emergency Liquidity Assistance[2].
This may yet be a precursor to the $620 billion EMS + the potential ECB cut of rates (most likely this week) and massive monetization of bonds possibly in support of the EMS.
Sorry for the chill: Gold’s rally was hardly about deflation.
[1] Zero Hedge Euro VIX Jumps As ECB Pumps, June 1, 2012
[2] See ECB’s Stealth Mechanism to Bailout Banks: Emergency Liquidity Assistance (ELA), May 25, 2012
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