goldbear77, From reading the article it seems to me the "Catch...

goldbear77,

From reading the article it seems to me the "Catch 22" situation that Europe faces is that Draghi wants to play the extend and pretend game like Japan has done in the slim hope that the last fiscal lever he and the ECB have, QE, can stimulate economic growth. The fuel to be able to execute this QE strategy is creating more government debt in Europe and monetising it. If Germany refuses to supply (create) more Bunds or the EU prohibits their supply then the supply can only come from the peripheral economies like Italy and Spain etc whose debt to GDP ratios are already unsustainably large. This I doubt would be a palatable or sensible solution for Europe so won't happen IMO. The bond bubble seems to have potentially reached a political stalemate.

Politically Japan has less problems because as long as the government of the day is willing they can continue to extend and pretend as long as the financial system can sustain it.

We know that certain large Italian and German banks are under significant capital pressure at the moment and that low interest rates driven by negative yields in the bond markets exacerbate the capital problems by putting pressure on bank revenues which in turn exacerbate their capital problems.

From my understanding (and let me know if you have a different understanding) the way bond yields are being driven lower is because the central banks worldwide are monetising government debt faster than the governments create it. This is how the bubble is formed. The governments issue the debt and it is bought by commercial banks (the primary dealers). The central banks buy the debt from the commercials. If the rate of central bank buying exceeds the rate of creation of the debt the supply of the bonds in the market falls and their prices rise and their yields therefore fall as well. Even though the US Federal reserve has stopped their QE programme the lack of supply of good quality sovereign debt in the rest of the world has driven international investor demand to seek out perceived safer and higher yielding US government securities. In so doing the supply of such securities has fallen and their prices have risen with corresponding falls in yields. That is why yields on US government securities have fallen along with the rest of the world, although the Feds policy bias has been towards tightening, ie contracting the money supply by, in theory, reversing the process and reducing its balance sheet by selling US government securities through its Open Market Operations. So far this process of falling yields on government debt has been good for the gold price.

My opinion is that if Germany government stops supplying Bunds their prices should rise and their yields should fall further, just as they have done in the US, as their supply will contract (as long as the German government doesn't take a tightening policy stance ie lift interest rates). This should be positive for gold in my opinion not withstanding the other possible repercussions that it might bring to Europe, its banking system, and the world financial system. The irony of the bond bubble in my opinion is that although there has never been so much debt created ever before in history of the world the supply of the financial instruments which that debt represents in relation to the money which is available to buy those instruments has never been smaller. Eshmun