Lower Euro Gold & Stronger Euro As ECB Balance Sheet Is Shrinking

It is remarkable to see Euro gold fast moving towards its one-year low after it touched its all-time highs in September 2012, slightly above €44,000 per kg. Euro gold lost 11% of its value in four months and is near significant support levels. Chart courtesy: Goldprice.org.

Euro_Gold_February_1st_2013

At the same time, less surprising, the USD/EUR chart reveals significant strength in the Euro in the same timeframe Euro gold has been losing value. Chart courtesy: Yahoo! Finance.

USD_vs_EUR_February_1st_2013

The answer to the declining Euro gold price and strengthening Euro currency is linked to the deflating balance sheet of the European Bank.

Greg Weldon, former Moore capital trader and one of the top macro and precious metals experts, published the following two charts (courtesy: WeldonOnline). The ECB balance sheet reveals it has dipped below 3 trillion Euro very recently, which is approximately 150 billion Euro lower than its June 2012 peak.

ECB_Balance_Sheet_Shrinking_January_2013

Mr. Draghi confirmed in June 2012 that he would do “whatever it takes ” to save Europe. The balance sheet net change has exploded in the same period of time. In the second half of 2012, however, the ECB did not continue their balance sheet expansion.

ECB_Balance_Sheet_Deflating_January_2013

Bloomberg reported recently that European banks are paying back their loans, leading to a shrinking balance sheet of the ECB … a stronger Euro … and a lower Euro gold price.

“Some 278 financial institutions will return 137.2 billion euros ($184.4 billion) on Jan. 30, the first opportunity for early repayment of the initial three-year loan, the Frankfurt- based ECB said in a statement today. That compares with the median forecast of 84 billion euros in a Bloomberg News survey of economists. The ECB’s first loan totalled 489 billion euros and banks can continue to make early repayments in coming weeks.”

“The ECB flooded financial markets with two tranches of so- called Longer Term Refinancing Operations totaling more than 1 trillion euros a year ago after banks stopped lending to each other because of Europe’s debt crisis. Banks have the option of repaying the loans, which were offered at the average of the ECB’s benchmark rate over their duration, after a year.”

This article was set up with an important contribution by K. Xeroudakis, Precious Metals Strategist and former macro risk taker in a private family office.

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