Sit Tight And Be Right

The “EUphoria” from the weekend’s Spanish bailout died out quickly yesterday, following news that Italy’s GDP fell 0.8% during Q1. Concerns that Italy is heading for the same rocks that the stricken ships SS Hellas and Iberia struck sent stocks lower, with the Dow closing down 1.1%. Ten-year Italian government bond yields crept into the dangerzone above 6% this morning, but have retreated back below this level since (perhaps as a result of the European Central Bank massaging the bond market). Platinum and palladium prices continue to drift lower with weakening industrial sentiment, but gold and silver are holding firmer, though for the moment gold remains capped at “round-number” resistance at $1,600.

Italy is in some respects in a stronger economic position than Greece or Spain. Though its government debt is around 123% of GDP (second only to Japan among major economies) its deficit is only around 2.4% of GDP – much lower than in Greece, Spain, Portugal, Ireland or France. In the UK and US this figure is closer to 10%. Italian private debt as a percentage of GDP is also much lower than in Spain, the UK or US.

But the big picture remains troubling for all western countries, regardless of how the numbers pan out an a case-by-case basis. All suffer from unsustainable government welfare systems, ageing populations (a point particularly relevant to Japan, southern Europe and Germany) zombie banks, and a monetary system that is now totally reliant on quantitative easing to sustain even nominal GDP growth. Hence the comments yesterday from the Bank of England’s Adam Posen, who said that the BoE should be buying private debt in an effort to “stimulate” the British economy.

What’s a gold bug to do? Sit tight and be right, that’s what. As Jesse says, you gotta “refuse to lose.”