After months of consolidation, gold finally broke through the key resistance of USD1160 and rose to its highest level in 2010 of just over USD1180 (highest since December 4th, 2009.) It also set new record highs in euros, Swiss francs and British pounds as ratings downgrades of Portugal and Greece fanned sovereign risk and contagion fears. The price of the yellow metal in euro and GBP terms went above €885/oz and £767/oz respectively.

The Greek drama continues, but on Thursday last week, The European Union’s commissioner for economic and monetary affairs, Olli Rehn, was reported as saying that the details of a deal were very close to being finalised.

Experts from the commission, the European Central Bank and the International Monetary Fund are ready to finalise a three-year programme expected to cost 120 billion euros (160 billion dollars) while Greece reforms its budgetary practices and its economy. The move to bail out Greece has seen its cost of borrowing to record highs; above nine percent, almost twice the rate the EU will charge. While the higher yields attract flows of funds, I prefer to put my faith in gold, which I believe will offer a much better return than nine percent over the coming year.

What amazes me is how politicians always seem to hide the truth. Only a few weeks ago I distinctly recall how they were all explaining how they were going to resolve this issue. Yet, every week thereafter not only did the problem grow even larger, it was not resolved. This leads me to believe that the problem over sovereign debt in other countries is more serious than we would like to think no matter the empty rhetoric made by the authorities. Nevertheless, there were a few words of truth spoken by Dominique Strauss-Kahn, the IMF’s chief when he said that the stability of the eurozone itself is in danger. “We need to act swiftly and strongly,” he said.

As the focus remains on Greece for now, it does not mean that the ongoing sovereign debt concerns of Portugal, Italy, Ireland, and Spain have suddenly dissipated. On the contrary, S&P cut Spanish debt one notch to AA with a negative outlook, warning that the fall-out from the housing bust will keep the country trapped in near slump until 2016. It said private sector debt of 178pc of GDP was a major concern.

Sprott Asset Management CEO Eric Sprott who is very long on gold recently said, “Gold looks better today than it ever did before.”  According to Sprott, the ongoing sovereign debt concerns in Greece and other “PIIGS” nations – Portugal, Italy, Ireland, Greece and Spain – as well as easy monetary policies across the globe are bullish for gold.

In an article published by Bloomberg, Angel Gurria, the Secretary General for the Organization of Cooperation and Development (OECD) said that Germany and other euro zone countries should do whatever possible to end Greece’s debt crisis, which is threatening to spread across the continent like the Ebola virus. “It’s not a question of the danger of contagion; contagion has already happened,” Gurria said.

In a report released last month by the Bank for International Settlements, there were some very interesting, but rather somber statements. In the report there was mention that “fiscal problems confronting industrial economies are bigger than suggested by official debt figures…As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing” One statement that couldn’t be further from the truth is “Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability…unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation.”

There was an interesting development in gold last week, which we have seen before in recent weeks. Usually, when the US dollar has strengthened, the price of gold has weakened and vice-a-versa. Yet, as the dollar strengthened against nearly every other currency, index, and commodity, gold prices firmed.  As the dollar strengthens we have seen US Treasuries rally as worried investors pile into the “perceived” safety and security of bonds. But, I now get a sense that investors perception of the safety of these financial instruments may be starting to change.  

Last week, the GLD ETF added another big stack of gold bars to its holdings. This time it was 195,740 troy ounces… a bit over six tons. The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust holdings hit a new record of 1,159.002 tons as of April 29.

TECHNICAL ANALYSIS

For weeks, gold has traded sideways in a consolidation pattern. However, last week we saw the price of the yellow metal break through a key resistance level of US$1160. This suggests that the price has a strong upward bias and should make new highs shortly.

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. www.lakeshoretrading.co.za