Europe’s Mexican Standoff

Who’s going to blink first? That’s the question many market watchers find themselves pondering today, following European Central Bank President Mario Draghi’s comments yesterday during a news conference in Frankfurt. Draghi confirmed that the ECB is prepared to conduct “unlimited” “unsterilised” “outright open market operations” to cap the rise in PIIGS bond yields, but stated that this would only occur once eurozone leaders had activated the twin EU bailout funds (the EFSF and ESM).

As Ambrose Evans-Pritchard reports though, this will require Spain – and perhaps Italy – to make a formal bailout request, and sign a memorandum giving Brussels total fiscal control over Spain. Not surprisingly, Spanish Prime Minister Mariano Rajoy has thus far been dead against this, while – as ever – the Bundesbank remains opposed to naked money printing from the ECB.

And while Draghi has talked the talked, he is still dragging his feet on the actual walking part of his pledge to do “whatever it takes” to save the eurozone. He states the ECB will start “drawing up plans” over the coming weeks for bond purchases, but as Bob Wenzel comments, printing money – or if you want to be more accurate, the electronic creation of new bank deposits in exchange for sovereign bonds – is not exactly rocket science from a technical perspective. Wenzel argues that Draghi’s coyness is a means of pressuring the German courts into accepting Berlin’s participation in bailouts. As this column has pointed out before, fear and uncertainty can be good allies of the EU “project” if they result in European governments being pressured into sacrificing more of their few remaining powers to Brussels.

What has this meant for gold and silver? Well, given the lingering uncertainty about when exactly the ECB will act, and similar reticence from the Bernanke Fed, the metals continue to trade sideways. But as Jim Sinclair says, the longer central banks wait, the more QE they will eventually have to do. And the more QE they do, the more violent the eventual upside breakout in precious metal prices.