The Daily Nugget: The US Says ‘OMG’ For OMT

For the first time since March, the gold price rallied in all major currencies Thursday, on the back of doubts that Draghi could do much to save the euro. Market participants were right to be worried as the ECB outlined a potentially unlimited bond-buying programme, dubbed Outright Monetary Transactions (OMT) in an attempt to draw a line under the crisis and address ‘unfounded’ fears.

"Unfounded fears?" The best example yet of using truly desperate hyperbole to try and distract everyone from what’s really going on. Well, the US stock market fell for it. It seemed to get really excited by the announcement of the eurozone’s latest rescue attempt and the US labour data – the S&P 500 finished at its highest level since the collapse of Lehman Brothers.

The bond-buying proposal was opposed by one member of the ECB Committee, now confirmed to be Jens Weidmann. The Bundesbank later released a statement which illustrated Weidmann’s fears of the new plan, “he regards such purchases as being tantamount to financing governments by printing banknotes.” Well, we’re glad someone realises what’s going on.

The announcement from the ECB came after many months of the currency union becoming increasingly fractious and divided. The plan announced yesterday was relatively restrained compared to what many had imagined he would announce after his "whatever it takes" speech.

The OMT reflects the months of sniping between the struggling and "wealthy" (Germany) euro countries which continue to reduce confidence in the union’s ability to solve this crisis, it was full of compromises. Whilst Draghi’s plan will most definitely buy the euro some more time, as will the one after that, the next steps are out of the central bank’s hands and into those of Italy and Spain.

This crisis will definitely not be solved in this way, this may delay the inevitable but the fiscal, competitive and social imbalances will begin to break through the cracks.

Following better than expected reports of the US labour market gold has now fallen back to levels seen earlier in the week. Reuters report that payrolls processor ADP said the U.S. private sector added the most jobs in August since March. This reduced expectations of weak nonfarm payroll data today which had been expected to prompt stimulus measures from the FOMC at the next meeting.

Regardless of labour data released both yesterday and later today, US unemployment still remains above 8% whilst record numbers of households are now applying for food stamps. The problem with data releases is they don’t show the true face of the crisis and cause markets to take short-term views on the status of a country’s finances.

Things get worse for the UK today which has seen its growth forecast from the OECD slashed from 0.4% to a 0.7% contraction. Considering the UK is seen as somewhat a safe haven at present, this is poor data in comparison to the US and Japan who are expected to grow by 2.3% and 2.2% respectively.

As expected, yesterday Sir Mervyn King, Governor of the Bank of England, announced the MPC had decided to hold interest rates and would continue with the current asset purchase programme. The programme, of £50bn of asset purchases, is due to end in October, at which point analysts expect the MPC to announce further action in their November meeting. Another kick in the teeth for savers.

Whilst gold’s rise to above $1700 yesterday was exciting it was an example of short-term investors rushing in. Its fall back to previous levels shows there is some support at $1690 and that the remaining events of September will be an exciting time to hold the yellow metal and choose gold bullion investment.