Emergency loan and worries about Eurozone boost metals

The political tinderbox of the recent ECB intervention in favour of Greece has been viewed by investors with great concern and has pushed up real assets such as metals

By approving the increase in ELA (Emergency Liquidity Assistance) lending, the ECB has effectively encroached upon the rescue policy of the donor states. The ELA lending is in the form of credit lines which the Greek central banks can grant to their local banks whenever these face temporary illiquidity and cannot be covered by the capital market. The ECB must approve the ELA lending and is therefore in the political crossfire since it is coming up against, not to mention violating, the ban on public financing. It would constitute a violation of the ban on public financing if the Greek local banks use the credit lines for financing the Greek government, and this cannot now be ruled out.
In this respect, the legal tussle before the Constitutional Court in Karlsruhe in September 2012 over the lawfulness of the ESM rescue package, and in particular the words of warning offered by presiding judge, Andreas Vosskuhle, hit the nail on the head. The ECB’s Governing Council also argues that by purchasing the bonds, it is acting “strictly in accordance with its mandate to maintain price stability” and that it intends to counteract market volatility. Vosskuhle unambiguously asserts that the ECB’s Treaty on the Functioning of the European Union gives no room for manoeuvre and that it would not be allowed directly or indirectly to finance Member States or their budgets by “printing money”. It is obvious that with the recent QE, the days in which the ECB money market policy is assessed on the basis of “ironing out market volatility and maintaining price stability” are in the past, and a new political dimension has been reached instead. It is also noteworthy that without this political balancing act by the ECB, Greece would have already have been out of the Eurozone long ago.
Investors have picked up on the delicate situation of the ECB concerning the ELA credit lines, which will also not be helped by a UK referendum on staying in the Eurozone. Against this backdrop, it is hardly surprising that investors are focusing on safe real assets and that metals might be seen in a positive light (YTD): gold 2.7%, silver 11.3%. Apart from precious metals, it is also worth noting that base metals have been on the rise and could capitalise upon recent growth forecasts (YTD): aluminium 0.8%, copper 1.6%, zinc 6.1%. Metals are effectively currencies and reflect their monetary and industrial roles. When investors view political or financial stability with scepticism, the monetary role always takes centre stage, in particular for gold and silver. Whereas recent concerns have been short-lived, industrial applications offer investors long-term potential, as the intrinsic value is not replicated by paper money and cannot be undermined by politics.

Stephan Mueller – precious metals specialist – GAM