On Thursday, Italy sold 7.02 billion euros of longer-dated bonds in the country’s final debt sale of the year. Although the yield on the 10-year bond decreased to 6.98 percent from November’s 7.56 percent, there is still plenty of concern weighing on the euro. The struggling euro has given a boost to the U.S. dollar, which has weakened gold prices.
Italy had aimed to raise 8.5 billion euros in today’s auction of longer-term debt, which came one day after the Treasury auctioned 9 billion euros in shorter-term bills at a 3.251 percent rate — about half the rate from the previous auction on November 25. Boris Schlossberg, director of currency research at GFT explained, “Overall today’s Italian auction data show that the world’s third-largest bond market remains under stress but may be slowly receding from the panic levels recorded in November,” However, after the auction, the yield on the 10-year climbed above 7 percent. With investors staying cautious on the euro, the U.S. dollar continues to be the safe-haven of choice. On Wednesday, the euro sank to a fresh 15-month low against the dollar, and a new 10-year low against the yen. Currently, the euro continues to trade below $1.30.
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With the euro having the largest weighting in the dollar index, it has been a strong week for the dollar. The dollar index has held above support at 79.50, and currently trades near 80.50. As a result, commodities and precious metals have seen a sharp pullback. Gold is on pace for its sixth consecutive session loss, while silver has declined about 10 percent in only a week.
As the euro zone continues to experience a credit crunch, the ECB will receive more pressure to cut interest rates and offer wide scale monetary easing. Both actions will benefit gold and silver. The dire situation in Europe can be seen by the M3 money supply in the euro zone, which is a general measure of cash in the economy. The annual rate of growth was 2 percent in November, down from 2.6 percent in October. Expectations were about 2.5 percent growth. Reuters reports, “The three-month moving average of M3 growth remains well below the ECB’s reference rate of 4.5 percent, above which the bank sees dangers to medium-term price stability. Economists said the figures made it more likely the ECB would look to offer the struggling economy more support by cutting interest rates further from their current record low of 1 percent.” Even though the ECB claims it will not print money to solve its problems, history and data tells us that it is just a matter of time before they do print.
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