In 1996, we visited the Bulgarian central bank at a time when the country was experiencing economic turmoil and a loss of confidence that the government could rollover its maturing debt. After a long discussion on the domestic economy and balance of payments, the chief policymaker looked us in the eyes and said, “we will not let the government default.” That is, the central bank would buy and effectively rollover all maturing government debt if the auctions failed. Within days the Lev began to reprice and we could buy nice Bulgarian wines for $.70 as domestic prices had not yet adjusted for the massive monetization.
The price action in gold today, after the sloppy trading of the past few weeks, may be the start of the market’s perception the ECB could be forced to monetize the PIIGS bond maturities coming due in 2011. This is doable for the smaller countries, but Spain and Italy are much more problematic. There are rumors in the market the ECB is buying Irish bonds today.
Gold held its 50-day and has been consolidating the sharp August-November rally. Some see a head-and-shoulders forming, but we’re looking for a new high before year-end and a close above $1,390 would negate the right shoulder. Take a look at the chart below and you can see several head-and-shoulders formations just in the past year, such as the trading pattern during March.
Nobody knows how this plays out. What will the Germans will do? Will an international facility be put together with Chinese support? Will we see a global TARP-like facility at the IMF? This is why we live and trade by the 11th commandment: “Those who remain flexible shall not be broken.” Stay tuned!