Oil prices tanked along with Gold on Friday as the EU summit seemed to make it Harder for Spain to ask for a bailout. German chancellor Angela Merkel’s demand that any cash from a euro-bond go directly to the Spanish banks as opposed to Spain’s government basically took away any chance that Spain would ask for a bailout before the end of this year.

At the same time the Wall Street Journal raised the possibility of a gold backed Eurobond as a way out of this crisis. Calling it a golden solution for Europe’s debt crisis they suggested that Europe go for the gold. The Journal said that “The idea is not to sell the stuff. Instead, the proposal is to bring down borrowing costs by using gold to guarantee the partial repayment of bonds to investors in case of a default. Italy's gold reserves would cover 24% of its estimated borrowing needs over the next two years and Portugal 30%. If the two countries could issue some unsecured debt at the same time, they could bridge an even longer period.  The Journal says that hypothetically it might help Italy to avoid asking its neighbors for a bailout and aid Portugal to regain access to the bond markets. 

There are precedents for using gold as security. Ansgar Belke, an economist at the University of Duisburg-Essen in Germany, points out that in the 1970s Italy and Portugal both used gold reserves as collateral for loans from other central banks and the Bank for International Settlements. In a paper commissioned by the WGC, he calculates that gold bonds could cut Portugal's borrowing costs for five-year bonds from 10% to 6%, if a third of the bonds' face value was guaranteed in gold, and to 5%, if half was guaranteed. Such bonds, he said, would "surely attract investors such as emerging-market governments and sovereign-wealth funds." Using gold to back government debt could not happen overnight. For one thing, the gold reserves are not in the government's coffers but in those of the national central banks. Though the reserves in question are separate from the gold these countries have placed with the ECB, the governing council of the ECB must agree to any transfers of gold to governments.

Yet gold backed bonds or not we know that when things look ugly in Europe we know it is bearish not only for gold but other commodities. We saw many get hit as commodity fund long positions sank to a 12 week low. Oil prices got hit of fears that China was slowing and Europe would not get its act together.

The good news is that gas prices are continuing to fall. According to my buddy Trilby Lundberg the average price for a gallon of regular gasoline fell more than 8 cents during the past two weeks. Gasoline prices averaged $3.7529 per gallon on October 19, down from $3.8375 on October 5. Lundberg said that Average prices at the pump in California fell 2.95 cents to $4.46 versus $4.49 @ weeks ago. The highest prices for regular gasoline recorded n San Francisco at $4.50 a gallon, while the lowest price was in  drivers in Tulsa, Oklahoma at $3.26 per gallon.

A report by the New York Times that the White House had agreed to unilateral talks with Iran about their nuclear program was dismissed by both parties. If there were going to be such talks then oil might fall hard but at this time the market is having a hard time believing the story.

The New York Times reports today that “The question of whether the United States should seek to engage Iran in one-on-one talks on its nuclear program joined the likely topics for Monday’s final presidential debate as supporters of President Obama and Mitt Romney jousted on Sunday over the issue. The prospect of such talks was raised in an article published over the weekend by The New York Times that said Iran and the United States had agreed in principle to direct talks after the presidential election.  On Saturday, the White House denied that a final agreement on direct talks had been reached, while saying that it remained open to such contacts. On Sunday, the Iranian Foreign Ministry dismissed the report. But if the report proved to be true, said a supporter of Mr. Romney, the Republican candidate, Iran’s motives should be seriously questioned.” “The Times, citing unnamed senior Obama administration officials, reported over the weekend that after secret exchanges, American and Iranian officials had agreed in principle to hold one-on-one negotiations between the nations, which have not had official diplomatic relations since the 1979 Islamic Revolution in Iran. “

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Phil Flynn

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