Europeans view gold as a cash equivalent? August (Q) settle 1551

As we return from the extended weekend, markets had a slight bias to the upside. The main headlines over the weekend included news of capital injections into Spanish bank Bankia, Greece injecting more money (what money?) into their banks, and China continuing to state that it will promote growth (and consequently, as the FT put it, discourage savings). Gold was slightly positive, until mid-day when seemingly out of nowhere, it fell off a cliff. Top to bottom, gold dropped nearly 30 dollars. Why?

The only big headline out at the time of the sell-off was  that Egan-Jones had downgraded Spain from BB- to B with a negative outlook. The Euro got slammed, and as has been the case of late, gold followed suit. Interestingly, while the commodities complex was getting hit, the stock market only sold of minimally. Still I have to wonder; why is this announcement from Egan-Jones a big deal to anyone? Spain is in a lot of trouble. This is not news and it provides no new information. So why do we care?

I have to be careful, because as I write, I find myself tempted to use terms like "supposed to be". The market is "supposed to be" a discounting mechanism. As such, news effects markets because of the perceived interpretation of how it might impact the value of an asset. A company raises guidance, at an unchanged P/E multiple, their stock should rise given expectation of better earnings. The Euro-zone doesn't come to a resolution at an important meeting; the Euro might sell off because market participants become concerned that positive solutions will be harder to come by than had been anticipated. But of course, markets aren't "supposed to be" anything. They are simply markets. Nonetheless, material sell-offs prompted by news that is already known, means that markets are trading off of headlines, even if they do nothing to change the sphere of knowledge that exists among market participants. I could cry about it, or just say what is inherently obvious: Markets react to Ratings Agencies despite the fact that their calls are almost always entirely composed of information that the market is already fully aware of. 
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A friend of mine sent me the following article this afternoon, and it is very telling about the German stance on gold.
(http://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debtors-must-pawn-their-gold-for-Eurobond-Redemption.html)


Conclusion?

It's bullish.

I thought the author, Ambrose Evans-Prichard, put it best stating "In effect, Germany would share its credit card to slash debt costs for Italy, Spain and others". The kicker is that Germany would require the countries they helped to put up gold as collateral. We already know that China and India believe that gold is a currency equivalent (if not better). With Germany indicating that they feel the same way, the long term bull case just gets better and better. Still, we are range-bound, and until we get at least above 1600, I see no reason to get your feet wet.