During the past week the debt crisis in the Eurozone took another turn for the worse. Italian yields hit an all-time high; Spanish, French and Portuguese yields soared and Germany battled to sell their bonds.

In Europe, it is clear that Greece is toast as they are not going to be able to pay back its debt meaning that Greek bonds are pretty much worthless. Until last month the European crisis was limited and a hope of being contained. Since then interest rates on French bonds, which had been following Germany, began following Spain and Italy higher. The 10-year yield on French bonds has surged in the past six weeks from about 2.50% to nearly 4%. Last week Italy managed to sell the maximum target of EUR 8 billion of six-month T-bills. Italy sold 8 billion euros of 6-month bills at a rate of 6.504%, a 14-year high and nearly double the 3.535% rate it received from a similar auction last month. Bid-to-cover ratio was at 1.47, showing weaker demand than prior auction with 1.57 bid-to-cover ratio last month. Yields on both two- and five-year bonds jumped to new euro era high in the secondary markets, at 7.70% and 7.80% respectively. The yield for the 10-year bonds remained above the 7% level, a level that is seen as unsustainable to Italy. Greece, Ireland and Portugal all had 10 year yield above 7% before seeking bailouts.

The recent developments “in euro-area sovereign bond markets suggest that contagion is spreading from peripheral countries to the so-called core countries,” European Union Economic and Monetary Affairs Olli Rehn said in Rome Friday.

Meanwhile, Thursday’s downgrade of Portugal’s rating by Fitch to BB+ junk status, and the downgrade of Hungary are also still troubling investors.

For weeks as the financial leaders as well as the political leaders have struggled to find a solution to this problem, the situation has simply gone from bad to worse. Only a few weeks ago, the European Financial Stability Facility (EFSF) seemed to be the answer. But, now it turns out that this facility does not have sufficient resources to bail out all the countries. The only alternative at this time is a massive bailout of European nations and European banks through a $3 trillion plus debt monetization.

On Monday there were rumours that The International Monetary Fund (IMF) is drawing up plans for a 600 billion euro assistance package for Italy. However, later in the day the rumour was dismissed by an IMF official who said that the IMF was not in discussions with Italian authorities on a financing plan. Nevertheless the euro extended its gains on another rumour about so called “elite” bonds. While Germany is known to be opposing the idea of bonds for the 17 nations, known as the Eurobonds, it’s reported that it’s in discussion with France, Finland, the Netherlands, Luxembourg and Austria, about jointly issue bonds. The joint bonds, called “elite-bonds”, are expected to stabilize AAA countries and could be used to raise funds to aid troubling nations including Italy and Spain.

No matter if it is Eurobonds, or Elite Bonds, or the EFSF or the ECB, or even the IMF, none of these financial institutions have enough money available. So, the only way out will be to create money out of thin air, in other words monetize the debt by printing more money. I wonder what these financial leaders will call it this time.  I would like to suggest a name…the European Bank Bail-Out Fund (EBBOF).

On Monday, Moody’s warned that the current sovereign debt crisis is now “threatening the credit standing of all European sovereigns.” The rating agency noted that according to its “central scenario”, the “euro area will be preserved without further widespread defaults”. But even in that case, there are still “very negative rating implications in the interim period”. Meanwhile, the probability of “multiple defaults” is “no longer negligible”. And “a series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area.”

Usually, one would expect to see gold soar under such circumstances, but when you look at the strength of the US dollar since the end of October, it is apparent that there is a tussle going on between the fiat currencies-especially the US dollar-and the price of gold. The price of gold has an inverse relationship with the US dollar and so when the value of the greenback appreciates it is reasonable to assume that the price of gold will weaken and vice-a-versa. And, since the end of October by looking at the US dollar index you can see that the value of the US dollar has appreciated by almost 6%, hence the fall in gold prices. Gold prices were under some pressure last week falling around 5% or approximately $100 an ounce despite the deepening of the debt crisis in the Eurozone as well as the failure of the US Congress in reaching a budget agreement.  However on Monday gold rebounded strongly as the USD dollar weakened and the euro strengthened.

As the fate of the European monetary union slides closer to the edge of a massive precipice, investors holding European sovereign debt are going to lose confidence and bail out of their bonds. As they seek safe haven investments, their first choice will no doubt be the US dollar as well as the Swiss franc, but there will be those who understand the value of owning gold as well and they will include it in their portfolios.

When investors turn to cash in an attempt to minimise losses in their portfolios, and as strange as it may seem, they still turn to the perceived safety of government bonds and cash. In the short-term cash is a safe-haven asset, but in the longer term, the value will be eroded by inflation and currency debasement. And, when it comes to government bonds, I maintain that there is nothing safe about these debt instruments especially when the governments issuing these bonds are essentially bankrupt. But in addition, the current yields are so low that they barely cover for inflation, or they are so high that they indicate an inherent weakness which suggests that the risk of investing may also be too high. While investors flee the euro and turn to the US dollar, it is not going to be long before their attention turns from the Eurozone back to the USA. But, in addition to these two major global currencies, the Yen, and Sterling are not much better alternatives. In other words the fiat currencies of the world are crumbling and as individuals around the world recognise what is going on and lose confidence in these paper currencies, they will turn to holding real tangible assets, in particular gold and silver.

The fundamentals driving the price of gold have not changed and the main driving force still remains the problems going on in the global monetary system. The size of global debt is simply too large in relationship to the size of the various economies. The only way out at the moment is to print more money. This will debase the value of some currencies, causing other currencies to become overvalued. This is in turn will create havoc in the global currency system, and send prices of most commodities much higher.

As the fate of the European monetary union slides closer to the edge of a massive precipice, investors holding European sovereign debt are going to lose confidence and bail out of their bonds. As they seek safe haven investments, their first choice will no doubt be the US dollar as well as the Swiss franc, but there will be those who understand the value of owning gold as well and they will include it in their portfolios.

While the price of gold continues to consolidate, I believe that this is merely the calm before the storm. I am certain prices are headed much higher, and gold is nowhere close to being in a bubble.



Gold prices remain stuck halfway between $1600/oz. and $1800/oz. The $1700 an ounce level (green line) is becoming a key level. As long as gold holds above this level, prices will remain neutral in the short-term with an upward bias. A break of this level could see prices drop to $1600 level. I favour firmer prices and a break above the $1800/oz. level.                               

About the author

 David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.


Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.